I re-learned a lesson about US securities law as I worked to launch The Funding Coach podcast. When you talk about your fundraising in a public forum, it may be considered “general solicitation” under SEC rules.
I’ll get to the implications for my podcast in a bit, but let me start with sharing a bit about securities law. This comes with a caveat: I know enough to be dangerous, and always recommend hiring an experienced securities attorney.
To 506(b) Or To 506(c)?
A big reason why securities laws exist is that there are scammers eager to steal the public’s money with false promises of guaranteed high returns.
A part of the process that is highly regulated to solve this problem is advertising, promotion and selling, known in securities-law-speak as “general solicitation.”
To oversimplify: since the 1934 securities laws were passed until equity crowdfunding was legalized and rules were set, companies could only advertise, promote and sell securities to the general public under the intensive and expensive rules surrounding Initial Public Offerings and being a publicly traded company.
Exceptions were made for companies selling securities just to the rich – accredited investors – but the rules for such offerings – 506(b) in SEC-speak – prohibit general solicitation to the public.
In other words, when you’re seeking angel investors using old-school 506(b) offerings, you can’t advertise and you have to be careful what you say in public forums.
Recent equity crowdfunding rules have made it possible to raise money more publicly from accredited investors as well as the general public. Angel crowdfunding is a viable option, but there is a different set of rules for such a 506(c) offering.
While the 506(c) rules are not onerous, they are different. Recently a securities attorney told me that old-school 506(b) offerings are still 20 times more common than 506(c) offerings.
I’m not going to detail all of the differences here. Really, you should talk to your securities lawyer about them. Really. And yes, I know it’s not cheap but the cost of screwing up can be high.
Don’t Share Projections
A big part of the scammer problem is that their pitch is guaranteeing a great future.
That translates into what’s known as “forward looking statements” in securities-speak. Here’s how Wikipedia summarizes them:
In United States business law, a forward-looking statement or safe harbor statement is a statement that cannot sustain itself as merely a historical fact . A forward-looking statement predicts, projects, or uses future events as expectations or possibilities. These statements can often be misleading, as they can be mistaken for factual statements, while they are actually speculation. According to United States Code 15 Section 78u-5, a forward-looking statement may include future economic performance such as revenues or income, plans for future operations, or use of a report written by an outside reviewer.
On The Funding Coach, I find myself naturally asking companies about their future: funding needs, revenue growth, cash flow and profitability.
This gets into the potential danger zone for companies currently raising money, or contemplating it for the near future. A securities attorney friend suggested that if a company is raising money within six months of the interview, they should be careful.
But What About “The Pitch?” “Shark Tank?” Demo Days?
For that matter, lots of accelerators organize Demo Days or equivalent events when participating startups pitch an audience that includes both accredited investors and the general public. In fact, tonight I’m attending the final Top Gun pitch contest.
There are two likely answers to how this is handled.
First, the lawyers for the companies on Shark Tank and The Pitch have likely told the startups that they are doing a 506(c) offering. I don’t know what happened for Shark Tank companies before crowdfunding was allowed. The show started in 2009, and angel crowdfunding wasn’t legal until 2015.
As for demo days, the SEC had this to say in 2015:
Question: Does a demo day or venture fair necessarily constitute a general solicitation for purposes of Rule 502(c)?
Answer: No. Whether a demo day or venture fair constitutes a general solicitation for purposes of Rule 502(c) is a facts and circumstances determination. Of course, if a presentation by the issuer does not involve an offer of a security, then the requirements of the Securities Act are not implicated. Where a presentation by the issuer involves an offer of a security, the presentation at a demo day or venture fair may not constitute a general solicitation if, for example, attendance at the demo day or venture fair is limited to persons with whom the issuer or the organizer of the event has a pre-existing, substantive relationship or have been contacted through an informal, personal network as described in Question 256.27. If potential investors are invited to the presentation by the issuer or a person acting on its behalf by means of a general solicitation and the presentation involves the offer of a security, Rule 506(c) may be available if the issuer takes reasonable steps to verify that any purchaser is an accredited investor and the purchasers in the offering are limited to accredited investors. [August 6, 2015]
Perfectly clear, right?
This is why securities lawyers are important, and well paid.
Erring On The Side Of Safe Harbors
Here’s where I come out. I’m trying to help entrepreneurs with their funding challenges. The last thing anyone needs is ambiguity about general solicitation.
So my interviews with companies on The Funding Coach will be available, at times, in two flavors:
- Public, widely distributed on iTunes interviews will steer clear of forward looking statements and discussions of funding details.
- Useful discussions of the future and specific current or near-term funding challenges will only be available on a members-only podcast. Those members will only be entrepreneurs, who must agree not to solicit investment from each other or invest in each other.
While it’s more work, the initial editing on the first four podcast shows indicates the public podcasts can still be useful without crossing the 506(c) boundaries.
It’s also more tech to set up, which is one of the reasons I’m not launching the podcast today as originally planned. But it should be coming soon!
And, I’m also thinking about creating a restricted membership Facebook group, again just for entrepreneurs, for private Facebook Live interviews with entrepreneurs. That might enable a more interactive experience for many entrepreneurs in the community.
Would that also be helpful? Please let me know!