General Solicitation Ban Lifted Today - Three Things You Must Know About It

It's official- startups can now publicly advertise that they are seeking investments, but it does come with additional responsibilities of which all entrepreneurs must be aware. In nine out of ten conversations with startups on RockThePost (a startup investing marketplace I co-founded), entrepreneurs were not aware of what it means to generally solicit or the implications tied to doing so set forth by the Securities and Exchange Commission (SEC). Among them, a potential consequence of failing to follow the regulations is being banned from fundraising for a year. Even if unintentional, acting against promulgated rules could lead to a death sentence for your startup. With changes in the legal landscape around openly fundraising and advertising investment opportunities, all heads of companies should understand Title II of the JOBS Act as it takes effect today.

Starting at the top, general solicitation means to publicly advertise the opening of an investment round in a private company by utilizing mass communication. Publicly advertising an investment round includes, but is not limited to, the following activities: 1. Revealing that the private company is actively seeking investments, 2. providing the details of the investment, such as the deal terms, and 3. revealing any additional information that is considered material for investors to know about the company in order to formulate an informed opinion.

This includes traditional and online media, such as, but not limited to:

A mass newsletter/email A public profile on a startup investment platform A company, personal or third-party website that displays openly that a startup is fundraising Public speaking engagements, such as conferences, panels, or forums Social media such as Facebook Facebook, Twitter, Linkedin or others Public videos

Anything that involves communicating pertinent deal term information on the fundraising efforts to a large audience of people who may or may not be accredited investors, will likely be considered general solicitation.

Beginning today, September 23rd, 2013, under Title ll of the JOBS Act, entrepreneurs will be permitted to publicly advertise that they are fundraising for their businesses, something that was previously illegal for the past 80 years under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933.

If startups choose to generally solicit their fundraising efforts, here are three things that they must do starting today in order comply with the new regulations of Title II as they stand:

1. Allow only accredited investors into the funding round

The regulations state that if you do a Regulation D Rule 506 (b) offering, which is private fundraising, you can have up to 35 non-accredited investors participating in your round as long you have a pre-existing relationship with them. In the event you decide to carry out a public fundraising, you relinquish that option. Only verified accredited investors are permitted to invest in private companies that are generally soliciting.

2. Verify that all these investors are accredited.

This means that from the time you start to generally solicit until the time you close your funding round, you will be required to provide official documentation to confirm that each investor meets the accredited investor threshold, according to the SEC requirements specified in Rule 501 of Regulation D.  This can be uncomfortable and burdensome for both investors and startups, but there are third-party services that do this.  For instance, we built a proprietary investor verification service with bank-level security to protect investors' personal information and remove the burden from entrepreneurs to verify the SEC-approved documentation.

3. Declare that a 506(c) publicly advertised offering was undertaken as part of the Form D filing.
Just as of today, you will have to file a Form D within 15 days of receiving your first investment.  This means you will have to declare that you publicly advertised your offering, under new 506(c) regulations.  No additional changes to this process are taking effect at this time.  This could change when amendments to the proposed general solicitation rules are released, but for the moment, there are no further steps to be taken for SEC filings.

In addition to the final rules that are actionable now, there are independently proposed rules that further define the requirements and procedures involved in general solicitation. On September 3rd, 2013 we submitted comments to the SEC, which you can read here, to help shape the spirit of the proposed regulations such that it works more seamlessly with the natural flow of startups fundraising.

Joe Wallin, a highly respected startup lawyer at the forefront of the general solicitation, provides deep insight into why this ban lift is a big deal for entrepreneurs in his blog, which I highly recommend reading. As Wallin says, "for as long as we have all been alive entrepreneurs have been hamstrung. Held down by rules and regulations. Prohibited from speaking to the public at large about what they were working on and the investment opportunity it presented." Today- all of that changes. To see the first startups taking advantage of the general solicitation ban lift, click here.