92 posts categorized "General Solicitation"

ACA Webinar on Accredited Investor Definition and Established Angel Group Certification

I've just listened to an archived recording of an excellent webinar presented by the Angel Capital Association last week (I had intended to listen in real time, but got pulled away): ACA Webinar on Accredited Investor Definition and Established Angel Group Certification.

Presented by ACA Executive Director Marianne Hudson and ACA Chair David Verrill, the hour long webcast covers how the accredited investor definition might change (and how that might impact the startup investing ecosystem) and what the Angel Capital Association is doing to facilitate the transition to the brave new world of general solicitation.

The chief initiative of the ACA is the "Established Angel Group" certification program, which is designed to help issuers implement the "principles based method" in satisfying the heightened accredited investor verification burden under new Reg D Rule 506(c) (which allows general solicitation). The Established Angel Group (or "EAG") certification program has potentially broader implications as well - for instance, if the accredited investor definition changes to put more weight on, or define an alternative path to accreditation based on, investor sophistication, the EAG could be important for purposes of both Rule 506(b) and Rule 506(c).

Inside baseball stuff, I know, but if you're interested in the history of how it came to be that only high net worth people were allowed to invest in startups, how that situation was seemingly democratized (somewhat) by the 2012 JOBS Act, and the rearguard action of state securities administrators and others to put a lid on the reforms, giving an hour of your time to this webinar will help fill you in.

Toning down the anxiety over accredited-investor verification

There are times to turn up the heat, and then there are times to cool things down.

I happen to be in the camp of those who found nothing wrong with Richard Sherman's in-the-moment taunting of Michael Crabtree. Stoke it up!

 

But there's too much anxiety over the aspect of new Rule 506(c) which requires issuers to take "reasonable steps" to verify the accredited status of their purchasers.

That anxiety caused the startup community to complain about the first iteration of 506(c) proposed by the SEC, which contained no safe harbors but just a flexible standard that would have been shaped over time by industry practice. That gift horse was looked in the mouth, and the SEC issued final rules that gave folks the safe harbors they asked for.

Result: more anxiety! People now worry about being straight-jacketed into the safe harbors!

So I'm glad leaders in the angel community are working to suck the anxiety out of the accreditation process, from the ACA's guidance last fall, to the new service from AngelList recently announced.

There are third-party services, too, handling accredited investor verification. But angel groups should be shaping industry practice, and it's good that they are stepping up to do so.

Mining Form D filings for quiet deals

Here's a good example of what I was getting on about in yesterday's post: a Mattermark tweet yesterday announcing, publicly, a planned fund that is claiming a 506(b) (quiet; no general solicitation and no general advertising allowed) exemption.

Mattermark is, I think, making a mission of indexing, tracking, rating startups, and anticipating when they will seek funding. In this case at least, the company is accessing the EDGAR database, open to anyone. The link the company supplies in the tweet takes you right to the EDGAR filing.

By the way, I wish more journalists would link to primary sources.

Outing startup financings

A key, legal rule for startups in the US seeking private financing changed in the fall: it is now okay to "generally solicit and generally advertise" that you are seeking funds.

The paradox of this rule is that it makes a lot of startup financing activity somewhat more private than it had been.

How's that?

The new rule set expressly preserved the old ban on "general advertising and general solicitation," while tacitly conceding that start up investors could self-police whether and how they met the accredited investor standard.

For those wishing to advertise their financing, the protocol of self policing accredited investor status was upended.

An immediate effect of the new rule set was that many startup founders took the measure of the price to be paid for generally soliciting, and re-committed to the old way of conducting financings. And, with all the attention to being paid to what constitutes "general solicitation and general advertising," this group of founders got quieter than they otherwise would've been: more careful not to discuss financing plans with reporters; screening pitch event opportunities more carefully; asking existing and prospective investors not to tweet about the deal.

Other founders launched boldly into the new world of private financing that is really public financing with a federal securities registration exemption. And a cottage industry of accredited investor verification shops is following to support them.

4477710440_c2dea67d2a_zAs the year begins, I'm noticing more and more "outing" of startup financings by third parties - companies, associations and individuals - possibly picking up the information slack caused by those choosing to go more conservative.

What happens if you are extra good about not advertising your offering, but somebody unknown to you tweets about it?

We can probably all agree that if the NSA knows about your Rule 506(b) (that's the version of the rule that continues to prohibit "general solicitation and general advertising"), you have not blown the exemption.

Similarly, when you file your Form D within 15 days of first sale, even though you're offering is ongoing, you haven't blown the exemption either. That's in spite of the fact that your filed Form D is easily accessed online by anyone.

But what duties might you have to shut down other channels of information, leaks of your financing plans?

Those wishing to "generally solicit or generally advertise" must take "reasonable steps" to verify the accredited status of their investors. If you opt for the other camp, the old rule where advertising is prohibited, will you end up having to swear your employees and investors to secrecy?

Photo: Thomas Hawk / Flickr.

General solicitation: a primer for lawyers

Lauren Hakala and Practical Law Company are at it again.

A few months ago, Lauren, a colleague at my firm and me put together a white paper on the phenomenon of accredited crowdfunding platforms.

4700641444_290c1b91c7_zNow, Lauren has teamed with my buddy Joe Wallin to write a similar white paper on the topic of general solicitation in startup financings.

Most startup and emerging companies I know are not - even after all the hoo-ha around the implementation of Rule 506(c) in September - going to engage in general solicitation. However, many startups, and particularly many led by first time entrepreneurs, are purportedly doing so. (See this post for an early indication of the trends.) For folks considering exposing themselves this way, and for their lawyers, Joe's and Lauren's whitepaper is a great resource.

Securities law has changed a lot in the past year. Kudos to Lauren and PLC for staying on top of, and even a bit ahead on, these changes.

Photo: National Library of Scotland / Flickr ("The original caption identifies the man on the right at Lieutenant General Sir John Stevens Cowans (1862-1921). The other man is unidentified but also bears the shoulder insignia of a Lieutenant General.")

Ruth Simon and Angus Loten WSJ articles this week about use of 506(c)

Ruth Simon and Angus Loten of the WSJ have a couple of really interesting articles this week, by way of tracking just how people are using the new accredited crowdfunding rule:

5917135851_7ce6399d13_zBy "accredited crowdfunding rule," I mean of course Rule 506(c), the new rule that lets issuers engage in general solicitation and general advertising, as long as all purchasers are accredited, the issuer takes reasonable steps to ensure each purchaser is accredited, and the issuer otherwise satisfies the applicable requirements of Reg D.

This is a BIG regulatory change. Recall how everyone always used to say, don't talk to reporters about your offering! Don't tweet it, don't blog about it! That's the old rule, which remains in place, renumbered now as Rule 506(b).

Well, the upshot of the Simon/Loten WSJ pieces, is, arguably, the maxims that follow from the old rule are still, as a practical matter, still in place. Don't talk to reporters about your offering! Don't tweet it, don't blog about it!

That's because the conditions of the new rule are not trivial. And also because of uncertainty about proposed rules that would make compliance with 506(c) even harder.

The Simon/Loten articles do, however, speak to examples of folks who are using 506(c). And he pieces relay some WSJ data/analysis on how much money has been raised under 506(c) so far.

"Among companies that have filed with the SEC, those that disclosed their fundraising goals say they intend to raise more than $25 billion, according to The Wall Street Journal's analysis. Since the new measure was implemented, firms that claimed the exemption and have since netted their first investor have raised a total of $1 billion, the analysis shows."

Thanks to Catherine Mott for pointing me to the Simon/Loten articles.

Image: Poster Boy / Flickr.

Early data on use of 506(c) (accredited crowdfunding)

Recent remarks by Keith Higgins, newly appointed Director of the SEC's Division of Corporate Finance, give us some early data on how issuers are making use of new Rule 506(c).

You'll recall that 506(c) is the rule that implements the lifting of the ban on general solicitation in offerings that otherwise meet the applicable Reg D requirements, and also limit purchasers to accredited investors who are subjected to a heightened verification standard. "Implements" refers to the Congressional mandate to do so, under the JOBS Act. (It's interesting to me that Higgins at least once in his written remarks refers to the Congressional mandate as "requiring the Commission to modify the prohibition against general solicitation," emphasis added.)

10727208825_da46007c6f_z

In a footnote to his written remarks, footnote 18 on page 10, Higgins relays the following information from the SEC's Division of Economic Risk Analysis (DERA):

"Based on the information reported in the initial Form D filings reviewed by DERA, as of October 18, 2013, there have been 170 new offerings made in reliance on the new Rule 506 exemption that became effective on September 23, 2013, with approximately $911 million in total amount sold in these offerings. In addition, 44 offerings that commenced in 2013, but before the effective date of the new Rule 506 exemption, were subsequently converted to offerings relying on the new exemption. Since the new rules became effective, the average offering size for Rule 506(c) offerings was $6.1 million, as compared to $22.8 million for Rule 506(b) offerings; the median offering size for Rule 506(c) offerings was $1.3 million, as compared to $1.8 million for Rule 506(b) offerings.

What does this suggest? Well, that issuers (be they startups or hedgefunds, we can't really tell from this data) are using 506(c); and that generally solicited offerings may be targeting smaller amounts than traditional 506 deals.

You may be thinking, the modest number of filings - some 200 - seems too small. After all, weren't thousands of startups going "public" with their "private" offerings on AngelList within hours of 506(c) becoming effective on September 23?

Ah, but recall that the filing deadline is 15 days from first sale. So there should be a healthy lag, at least as long as the current filing requirements remain in place (recall that proposed rules are out, imposing pre-filing requirements for 506(c) deals and lots of other not-so-fun changes for both 506(c) and 506(b)).

Thanks to articles by Broc Romanek and Sarah Lynch for identifying Higgins' testimony.

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