Yesterday the SEC held a meeting of top advisors and staff to discuss the latest rulemakings and initiatives from within the Commission. The Angel Capital Association was invited to speak on a new rule to go into effect on September 23rd that lifts the ban on general solicitation for private placement offerings under new Rule 506(c) of Regulation D.
Angel investors have been vocal about their concerns regarding certain elements of this new rule…
The SEC needs to recognize the power of angels, and the value chain of funding a company from startup to successful exit. The SEC needs to protect angels with safe harbors against 506c. The SEC needs to continue preserving the self-certification of accreditation in 506b. And the SEC needs to maintain the current levels of income and wealth for accreditation without onerous and unnecessary requirements – including third parties. Only these actions will allow the Jumpstart Our Business Startups (JOBS) Act to achieve its intended goals – to make it easier for companies to gain funding, and create more high paying jobs.David Verrill, WSJ Op-Ed, July 2013
Self accreditation provides a fast and easy way for angel investors to self-certify without having to expose specifics regarding their income and/or net worth. At one point some within the ACA were calling this verification standard an “angel killer,” but that stance has since softened based on language in the rule allowing for “principles-based verification.” The ACA has issued their own guidance on verification standards.
The topic of pitch events was also discussed prominently, as William Carlton explained on his Counselor @ Law blog…
The most dramatic moment of the meeting yesterday was when Catherine Mott, a member of the advisory group, former Chair of the ACA, and angel investor, asked the staff whether demo days and pitch events – common features of today’s startup financing ecosystem, ostensibly okay in the past under old 506 – constituted general solicitation.
This issue will resonate deeply with the startup community, many of whom have arguably been generally soliciting their offerings for years via various demo days and pitch events. This exact issue was recently included in a notice filed against Candace Klein by the State of Ohio, a move that seemed unfair considering the proliferation of these types of activities within the greater startup ecosystem. It led Charles Sidman to question whether the State of Ohio was participating in “selective enforcement.”
There is a definite desire for guidance from the SEC on what does and does not constitute general solicitation, and until clear guidance is offered it may be difficult to gauge what net effect Rule 506(c) may have on capital formation.
The ACA was represented at the meeting by David Verrill, Chair, and Marianne Hudson, Executive Director. The ACA’s stated key concerns were…
- Significant burden and disproportionate impact on startups and small businesses
- Pitch events are a long-standing practice – many in the ecosystem will not realize these may be general solicitation
- Many startups will not be aware of rules and accidentally break them
- If filings are inadvertantly missed, the issuer cannot raise under a 506 offering for a year. With no cash, startups go out of business
- Issuers may have to file multiple Form Ds as business models change
- Disclosures and legends take away from advertising opportunities and increase costs
- All ad material must be provided on first day of use
- Rules don’t include constrants for SEC use of materials
- Is material collection even possible from a technology standpoint?
- Potential of issuer mistakes adds to risks – many investors will not invest
When considered in totality, it seems the ACA’s message is clear. For regulators and on behalf of angel investors, there is still work to be done.