As readers of this and other startup-focused blogs will be aware, exactly one week ago today general solicitation of securities offerings to accredited investors became legal for the first time in 80 years. Prior to the 23rd of September, coverage of this upcoming shift was divided with some predicting major alterations to the landscape, others predicting hardly any change at all, and yet others delaying judgment, at least until some additional proposed rules are finalized.
Reading the Tea Leaves
What can we learn from the first week’s tea leaves regarding the initial reaction to general solicitation? Some notable actors were off to the races, with folks like AngelList and WeFunder immediately jumping in and offering solutions that take advantage of the broad exposure offered by general solicitation (while recognizing the need to still comply with accredited investor requirements). Leading the charge were Second Market and WeFunder. The latter has taken perhaps the most proactive stance on general solicitation, even offering to do some securities work on behalf of companies (using generic forms). These companies seem to be betting that the current window between the enactment of the rules adopted in July allowing for general solicitation and the pending adoption of any of the proposed rules will give them a significant head start on their competitors. They are also betting that any new rules won’t change things significantly (the best case for them), or at least won’t be applied retroactively.
On the opposite end, FundersClub has taken a cautious “wait-and-see” approach. CEO Alex Mittal has made it clear that the VCs, angel investors, law firms and others that he has consulted with continue to regard the current climate surrounding general solicitation as a grey area, and many of these funders have told him that they will actively avoid investment in companies who have taken advantage of public fundraising. Some angel groups have even said on the record that they will not invest in startups who have used general solicitation.
In the first week alone, we have seen a broad array of companies ranging from hair care products to flying cars take advantage of the new rules on general solicitation. As the confusion over general solicitation continues to shake out, and companies and investors come out speaking for and against the new rules, it is generally a good idea for early stage companies to keep perspective and realize a couple of things:
- The current situation still in a state of flux. Although there are some final rules regarding general solicitation, there are still additional proposed rules that could alter the landscape drastically once again in the short-term. If you feel strongly about these rules, the SEC has extended the comment period for an additional 30 days. You can submit your comment here. Here are some comments from Joe Wallin to get you started.
- A change this big will take time to sort out. Allowing general solicitation represents a tectonic shift in the way securities laws regarding registration-exempt offerings in the U.S. are structured. It is wise to expect a long “burn in” period for these rules and interpretations, and a significant amount of amendment and fine tuning.
For these reasons, and because many VC and angel funders have already expressed an aversion to companies who have generally solicited, the best course of action may be to sit tight and wait until the fog has cleared over general solicitation.