There was a lot of excitement when the JOBS Act hit the StartUp scene in 2012, but with the SEC’s proposed rules sitting in limbo, not many have found cause to celebrate the once welcomed change.
Overall, people agree that it was awesome that an area of law that wasn’t touched for 80 years finally received a nudge. Yet why is the start up community hesitant to celebrate the change? It’s because the SEC’s proposed additional rules could heighten the requirements and regulations associated with General Solicitation.
As VC Fred Wilson put it, “If the SEC’s intention, with these proposed additional rules, is to neuter General Solicitation to the point that it is legal but nobody avails themselves of it, they will succeed.” Read more here.
Right now under the new rules effective as of September 23, 2013, one can generally solicit an all-accredited investor offering under Rule 506 (c) of Regulation D, so long as you follow these steps:
- Only accredited investors can give you money. Accredited investors are generally folks with a net worth of greater than $1M (excluding their primary residence) or individuals with incomes in excess of $200k in the last 2 years (with expectations of the same income in the current year) or $300k for married folks.
- You must verify the accredited investor. This means you have to take reasonable steps to review their financial information, including W-2s and other personal financial statements.
- Check the Form D box indicating that you generally solicited.
The SEC’S proposed rules would add some extra punch to these requirements, to say the least. Here are some of the bigger changes that may occur if the proposed rules kick in:
- There will be a 15-day requirement to file Form D in a 506(c) offering BEFORE the startup engages in general solicitation. This is likely going to require some extra hands on deck, making sure the information is on-point and adheres to the SEC rules and guidelines.
- You will have to submit written general solicitation materials used in the 506(c) offering to the SEC before they are used to generally solicit. This is very time consuming. I know startups that change their pitch deck for every investor meeting. They’d have to submit each deck to the SEC.
- The written materials require specific legends. Your Legend of Zelda skills may kick in here.
- Startups may be disqualified from relying on 506 for 1 year for future offering if they, or those related, did not comply with Form D requirements within the last 5 years. Not a fun surprise.
- Form D will require a lot more information to be filled in. Get ready for some extra reading. TL:DR will not work here.
- Form D will require a filing of a closing amendment after the termination of any Rule 506 offering. Yay to more To-Dos.
Bottom line: In all, the changes will add extra work that will require startups to really go the extra mile for their investors. While some see the proposed rules as a complete halt towards funds, others see them as just another hurdle on the way to startup success. I guess time will tell.
Remember folks, this is a blog meant for general information purposes only. Please do not post confidential information here, and in no way, does any of this establish a client-attorney relationship. Carry on.