Compliance Bricks and Mortar – Solicitation and Advertising Edition

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On Monday, the new SEC Rule 506(c) became effective, lifting the ban on general solicitation and advertising, creating a new era of public private-placements. These are some of the stories on the effect of the new the rule that caught my attention.

Pros and Cons of General Solicitation by Joe Wallin in Startup Law Blog

Well, ok. In the old days, you couldn’t generally solicit or generally advertise your securities offerings. You had to work pre-existing contact to pre-existing contact. You were not supposed to stand up on a stage at an industry conference and say, ‘We are raising $500,000 in Series A at $1.00 a share. Please see me and I’d love to talk to you about it.’ In fact, this was illegal. It was also illegal to blog or Tweet or use Facebook to try to raise money. Many people broke the rules. Some got in a lot of trouble.”

Angel investing: The walls come tumbling down by William Carleton in Geekwire

Some angel group leaders have been advising companies to not go there. Some angels are taking the position that they will not be investing in any deals that involve general solicitation or general advertising. The reps and warranties are already being written: “Company has not engaged in general solicitation and is not otherwise subject to Rule 506(c) . . . .” Access to many angel group meetings and demo events is being tightened up, in an effort to preserve the availability of the old rule, now known as Rule 506(b), which very much remains a viable option. (Kudos to the SEC for having the foresight to preserve the old rule in parallel with the new.)

Small Businesses Take Fundraising Public Small Businesses Take Fundraising Public by Angus Loten in the Wall Street Journal

Douglas Penman, for instance, says he is planning to make T-shirts promoting investment opportunities in his San Francisco startup, Nukotoys Inc., which makes children’s educational trading cards for mobile devices. He’s hoping to have the T-shirts worn by skyscraper window washers, to catch the eye of wealthy executives inside. The company, launched in 2010, is looking to raise $2 million to expand its user base, he says.

Online Platforms Give the First Public Look at Private Equity by Paul Spinrad in PBS’s Mediashift

A major change in federal securities regulations takes effect this week, and many people are wondering how it will turn out. It’s now legal — with the proper filings and for the first time in over 80 years — for businesses to publicly advertise for investors. Proponents hope that this change will spur entrepreneurship, job creation and innovation nationwide, particularly in areas outside of the typical startup hotspot cities. Detractors fear that the regs will provide a new mechanism for fraudsters to scam retirees and others out of their wealth. Either way, the system known as “private equity” won’t always be so private anymore — and as of Monday morning, several online platforms discussed below are giving the public its first look at the formerly secret world of startup investing.

General Solicitation Brings Startups Capital, Risks by Evelyn M. Rusli and Andrew Ackerman in WSJ.com’s Digits

“The government is doubling down on the idea that accredited investors can fend for themselves,” said William Carleton, a Seattle-based startup lawyer.

ERA’s demo day: “This is not a general solicitation” by Erin Griffith in PandoDaily

However, as I predicted, the pitches conspicuously left off a crucial piece. Up until this week, most demo day speeches end with something like “We’re raising $750,000 in seed funding and we already have a third of it committed from top-tier angel investors.”

But today the demos very carefully avoided that. “If you’re interested in changing the way the world books its wedding bands (or sells its used clothing, or buys its farm machinery or whatever), talk to us afterwards,” the founders declared. No fundraising, no dollar signs, no explicit asks.

How General Solicitation Will Change Private Equity And Venture Capital Forever by Ryan Caldbeck in Forbes.com

According to public filings from SEC.gov, in 2012 there were over 30,000 Reg D offerings. Collectively, they raised $1.3 trillion. About $1.1 trillion is related to financial services and pooled investment funds- i.e. hedge funds, private equity funds and similar groups raising money. The remainder spans industries from agriculture to telecom. All 30,000 of those offerings took place in a ‘silent’ offering, with no mention of the capital raise in public. The result was both inefficient, and costly for investors and the issuers.

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