In a comment letter submitted to the SEC, AngelList co-founder and CEO Naval Ravikant raises concerns over a proposed rule that would require startups seeking funding to file Form D 15 days before general solicitation takes place.
In a nutshell, Ravikant expresses doubt that entrepreneurs are sophisticated enough to understand the consequences of noncompliance. In his words, the rule seems “against the spirit of the JOBS Act.” He argues that the goal of the JOBS Act was to facilitate capital formation for startups, and exposing startups and the entrepreneurs that start them to significant risk of noncompliance could harm efforts toward that goal. From his letter…
Modern entrepreneurs usually are not well-financed business people; they are engineers and designers who realize their idea is growing fast enough that they need capital to feed it. They often need small amounts of capital (less than $1 million) and can’t afford the lawyers, investment bankers and broker dealers the proposed rules imply must be available to them. The proposed requirements involve many technical legal determinations, which most startups will not be able to afford at that stage. Because the rules are written with well-financed and well-lawyered issuers in mind, the result will be inadvertent non-compliance by otherwise well-meaning startups. Combined with the stiff penalties, this can prevent the early stage startups from fundraising entirely We believe the requirements should take into account the more limited resources of the startup community.
He proposes six alternatives, which are as follows…
- Allow third parties to do the filing on issuer’s behalf via API2. Sites like AngelList can automatically register, via API, some very simple data with the SEC: Company, founder, contact information, date when they turned on financing, optional URL to view financing materials. We can help both communicate the new regulations and facilitate compliance with them. This only works if we don’t have to collect heavyweight information envisioned in a Form D – just a lightweight “we’re raising” sent at any time up to close.
- Allow the company (or a third party like AngelList) to hold the financing materials so the SEC can access them. Companies should just need to give the SEC a simple URL where most of the financing activity happens, as opposed to making a formal filing with the SEC every time an update is made. AngelList or other sites can keep change logs so the SEC can see what the materials looked like at a point in time.
- Only require legends and disclosures when terms are communicated. Acknowledging the existence of the financing somewhere publicly (media, Twitter, conferences, etc.) shouldn’t require legends and disclosures.
- Drop the 15-day-in-advance before financing rule entirely. This creates a minefield for startups without actually helping anybody – even the SEC states that they won’t review the materials at that time. Make the Form D filing “after the fact” as it is today.
- Don’t impose death penalties for noncompliance. Instead, reduce the costs of compliance. The reason for the high non-compliance rates in the venture and startup community is that the information made public by the Form D is usually highly confidential. Startups often want to control the timing of their financing announcement and prefer not to reveal amounts raised for competitive reasons. If more of the Form D information was confidential rather than public, compliance rates would jump dramatically.
- Don’t be overly broad in the penalty application. There are many businesses like AngelList, incubators, and VCs that surround startups. These businesses are built to avoid getting in the way of a startup’s autonomy – they should not be penalized for activities that a startup undertakes on their own that the business can’t control. The current penalties seem to apply broadly; any penalties should be applied only to the entity that doesn’t comply, not to all of the supporting businesses surrounding it.
What do you think? Do the Form D filing requirements present a significant risk to startups? Let us know in the comments.