The other day, Adam Lieb of Duxter and I had the chance to correspond with each other about the SEC’s now effective general solicitation rules and the SEC’s proposed rules regarding Regulation D and Form D. Adam had a bunch of questions and we both thought that it would be helpful to write a blog post about them.
QUESTIONS FROM A STARTUP FOUNDER
Adam: When I was in school I participated in a business plan competition. As part of that competition I made “an ask” where I asked the audience to invest in my business and gave terms. Under the proposed rules would I have been required to file with the SEC before the competition?
Joe: Unless this was play acting like in a Shakespeare class, if you were sincerely asking for funds, it would depend on how the event was advertised. If the event was announced to the public on the Internet, and real prospective investors were in the crowd or on the judging panel (as is often the case), then the answer is almost certainly yes. The reason for this is the SEC considers the posting of anything on an unrestricted website to be general solicitation. If the proposed rules go into effect as they are proposed, you would have been required to file an “Advance Form D” 15 days before participating in the competition and making the “ask.” If you missed this filing because you didn’t know about it, and you didn’t “cure” the mistake within 30 days, you would have been automatically disqualified from using Rule 506 for one year after the end of that offering. An absurd result.
Adam: Most demo days I have seen have online registrations for entrepreneurs and investors to attend the event. Would this count as general solicitation under the new rules?
Joe: Per SEC guidance, posting something on the unrestricted Internet constitutes general solicitation. If companies attend these events and pitch for funds, they will likely be considered to have generally solicited their offerings.
Adam: When I am fundraising, I change my fundraising materials A LOT. If I meet an investor three times before getting a yes or a no, and I change my materials each time, would I have to file those materials with the SEC before each meeting?
Joe: Under the proposed rules, if you are generally soliciting, each time you change your written materials you have to submit them to the SEC before their use.
Adam: What is the point of filing my materials with the SEC? Are they going to review them?
Joe: The SEC may very well review them, but is not obligated to do so..
Adam: Can my competitors view the materials I file with the SEC?
Joe: Your Form D, yes. Your written general solicitation materials, no.