Will it soon be legal for startups to advertise for investors?By http://profile.typepad.com/1237764140s22740 // July 5, 2013 in General Solicitation
Thanks to David Fisher for the heads up that the SEC is having a meeting next Wednesday morning to take up rules on lifting the ban on general solicitation in angel financings.
I will plan to liveblog the webcast of the meeting, beginning around 7 AM Pacific time.
To recap, the JOBS Act of 2012 required the SEC, by last summer, to write rules to implement the lifting of the ban on general solicitation in Rule 506 offerings where all purchasers are accredited investors.
The difficult aspect of this charge from Congress was in figuring out how to implement the "verification" mandate also imposed by Congress: one way or another, it's going to take more process and effort to validate who is and is not accredited, at least with respect to offerings that want to utilize general solicitation.
I, and a very few other commentators, happened to like the proposed rules published by the SEC last August. But no one else did, so, the Commission went back to the drawing board.
Things to watch for on Wednesday:
- Will the rules continue to bifurcate Rule 506, with no changes under the existing rule where no general solicitation is utilized, and the more exacting "verification" standards kicking in only where general solicitation is utilized?
- How flexible will the verification standards be? Will a new, cottage industry of "accredited investor verification" services be spawned, or will emphasis be on simple ways that individual startups and emerging companies can undertake "verification" on their own?
- Will certain verification standards have the effect of pushing up a typical, minimum angel investment size, even as the proliferation of accredited crowdfunding platforms is taking angel investing in the opposite direction, i.e., smaller investments per investor per deal, and the spreading of an individual angel's investment capital over a broader portfolio?
- Will verification have implications for accredited crowdfunding portals relying on one or more of the alternative broker-dealer exemptions available? (This is a complicated subject. See this accredited crowdfunding Q&A that a colleague and I wrote in collaboration with an editor at Practical Law Company.) Under this SEC staff FAQ interpreting the JOBS Act Section 201(c) exemption, the angel group platform exemption, the lifting of the ban on general solicitation is arguably a very big deal indeed; for the de facto exemptions construed from the FundersClub and AngelList no-action letters, all sorts of promotional activity originating from behind the platform's "walled garden" doesn't seem to count as "general solicitation."
We've written about and discussed general solicitation for a number of years now on this blog. The posts are collected under this category tag. Long term, even if "quiet 506" (Joe Bartlett's phrase) is preserved, that preservation is likely to be a transitional bridge; the whole ecosystem is likely to move to the "noisy 506" (Bartlett again) regime, and the hope has got to be that angel investing will still continue to expand and accelerate in spite of new "verification" restraints.
Photo: "Division commander, 84th Division, Maj. General Hale, with division staff and attached French officers, Camp Zachary Taylor, Ky., November 21, 1917 (LOC)" / Flickr.