September 23 is an historic day. For the first time in 80 years entrepreneurs can advertise for money. Unlike Silicon Valley where random whispering in a Starbucks is likely to be overheard by 15 accredited angel investors (with investment checks written before the latte foam settles), here in Cleveland and throughout most of the country active angel investors are hard to find. The removal of the ban on 'General Solicitation' should improve the odds for the rest of us and truly change the startup landscape.
We've had 'Stock Markets' for centuries but 'Stock Marketing' starts today. Effective today you can advertise stock in your new company just like you advertise your new restaurant. With one exception - you can only take money from millionaires. Wait - that still sounds pretty good, and it is. There are 8 million accredited investors in the United States, today only about 3% are angel investors. The long-term effect of stock marketing will be to significantly increase the number of active angel investors and thereby, the pool of available startup capital.
This new era of Stock Marketing should transform the startup community. No longer will entrepreneurs be limited to raising money from a small circle of friends and acquaintances who are rarely millionaires or the handful of sophisticated investors they may be lucky to know. Instead financial capital will be able to transcend geographic borders and flow freely to startups throughout the country.
Our company Flashstarts is a startup accelerator. We moved our Demo Day to Monday, September 23 to allow our companies to leverage this historic change. In order for our 10 companies to fully, effectively, and legally utilize stock marketing we assembled some guidelines. We are happy to share them, provided you promise to read the disclaimer at the end.
Guidelines for General Solicitation
- New SEC regulations allow companies to publicly raise money for the first time in 80 years. Called General Solicitation, companies can, as of September 23, 2013, publicly advertise their unregistered security offerings to investors.
- This new regulation, 506(c), however, requires that, if companies elect to use general solicitation, they must use reasonable efforts to verify that every investor is accredited -- meaning that the investor earns more than $200,000 per year individually ($300,000 with a spouse) or has more than $1,000,000 in net assets.
- The SEC outlined specific steps that it considers to be reasonable efforts to verify that an investor is accredited: companies can either review investors' tax returns or receive confirmation from third parties such as a registered broker-dealers, investment advisers, attorneys or CPAs. Crowdentials helps startups and investors complete this verification process and comply with the new rules.
- If a company generally solicits at all during its fundraising process, it cannot accept capital from any non-accredited investors in that fundraising round.
- Failure to comply could result in the loss of the underlying registration exemption or a (proposed) one-year ban on fundraising.
- General Solicitation includes all communications that can be read, seen, or heard by people a company does not know: advertising of any kind; press releases; large group presentations; Demo Days; business plan competitions; YouTube videos; tweets; podcasts; unsolicited email; blog comments; Facebook updates; LinkedIn comments; and all other public forums.
- Once a company generally solicits in any form it cannot 'undo' the action.
- General Solicitation puts an added premium on the precision and accuracy of a company's language. The SEC and State Security regulators will be paying close attention to companies that utilize the 506(c) regulation. Do not engage in any exaggeration or puffery - particularly with any historical statements.
- Companies should utilize a private online document room (like OneHub) where all corporate documents can be made available to prospective investors.
- Full-disclosure and total transparency should be the goal of the diligence materials provided to prospective investors. The password protected nature of online document rooms enables companies to be selective regarding the investors they include.
- Companies should be upfront with and straightforward about the potential risks associated with investing in their securities. Diligence and presentation materials should clearly state these risks and remind investors that they may lose the entirety of their investment.
- Companies must file Form D within 15 days of the first sale of securities (i.e., when the company receives the first check and signed documents from the first investor). Companies can consider filing Form D earlier if they so choose. (NOTE: There are proposed regulations changing the filing requirement to BEFORE solicitation begins.)
- The SEC proposed that solicitations include a Legend such as this SEC Disclaimer. We recommend that companies add this legend to solicitations that occur on online, by email, and even potentially in person.
- The SEC has a number of proposed regulations, and these requirements for startups will likely change in the next couple of years. Companies should continually monitor the SEC's developments and make sure that they are in compliance.
These guidelines were developed from reviews of the JOBS Act, the SEC Regulations, and public commentary. They do not represent a legal opinion of any kind. This document is an attempt to summarize the regulations for entrepreneurs. As with any summary, much nuance, precision and detail has been lost. All situations are unique, and there is significant legal expertise required to apply the regulations to a specific factual situation. Companies should seek the opinion of an actual attorney.