As has been continuously reported in the media, and on fine law blogs, today marks the end of the 80 year ban on general solicitation (public advertisement) for securities sales. This means that for the first time since the Securities Act of 1933 was enacted, companies will be able to go out and solicit groups of accredited investors to invest in their startups, provided that they:
- Check a box on their form D indicating that they have generally solicited;
- Take additional steps to verify that their investors are in fact accredited (one page questionnaire no longer good enough); and
- Ensure that they do not accept any funds from non-accredited investors.
#1 is self explanatory. #2 requires a bit of attention, because in the past is was sufficient to have an investor fill out a basic questionnaire verifying that they comply with the definition of “accredited”, as defined in Rule 501 of Regulation D. Now, however, those generally soliciting investments must take “reasonable steps” to ensure that the investors are indeed accredited, and must keep proof of having done so. This means that you will need to ask for personal financial documentation, such as copies of form W-2 or 1040, bank statements from past three months, and brokerage statements from your potential seed or Angel investors. Many will scoff at this intrusive requirement.
#3 is also important. While a “regular” Rule 506 offering still allows for up to 35 non-accredited investors, if you check the box indicating that you’ve generally solicited, you may not sell ANY shares to non-accredited investors.
In addition, the SEC took the confusing step of issuing a set of proposed rules on the very same day that the final rules were adopted. Note that these proposed rules are NOT effective today, and comments are still open. If adopted, the requirements for general solicitation would become much more onerous, requiring additional disclosures and reporting to the SEC. These rules would also require an advanced Form D to be filed 15 days in advance of any general solicitation, and an updated Form D within 30 days after the offering ends. Failure to file the Form D would result in an automatic one-year period during which an offeror would be disqualified from using the Rule 506 exemptions to raise funding. Problematically, the SEC has not offered a clear definition of what they would consider a general solicitation, and therefore young companies participating in demo days or pitch competitions could potentially find themselves having “generally solicited” and thus disqualified from seeking any funding for an entire year—a death sentence for most companies. This is a poorly thought out position and an exceedingly bad idea.
But don’t just take my word for it, read the official comments from other attorneys, entrepreneurs and interested parties. If you agree that the proposed rules are a bad idea, please comment as such on the SEC web site. If you need help with what to say or how to say it, Joe Wallin has posted some helpful text to get you started.