A couple of weeks ago, I hosted a meetup at Galvanize with a number of other attorneys (signup info for the meetup can be found here). The subject of the meetup was legal issues for crowdfunding and fundraising. We provided background on the new SEC rules for crowdfunding and discussed the ways in which we thought they might be implemented.
The issue that got the lawyers most worked up was the question of what constitutes a general solicitation in the context of a private securities offering.
The question is important because until recently, general solicitation in the context of a securities offering was illegal. Now, in certain limited contexts, it is permitted. But the regulatory burden to comply with securities offerings that have general solicitation (506(c) offerings) is very different from other types of private placemements (506(b) offerings).
What is general solicitation?
According to rule 502(c), general solicitation means any attempt to sell or offer securities that includes:
• any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television and radio; and
• any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
Is a pitch day a general solicitation?
This is where things get murky. Pitch events have exploded across every part of startup community. From Techstars demo day, to New Tech, to Angel Pitch events, everywhere you turn, startups are getting out there to promote their products to the general public. And since the exit strategy is so interwoven into the startup process, capital needs get layered into that somewhere.
But when the “offering of securities” gets brought into the process of pitching, all of the sudden what’s happened is a serious violation of applicable securities laws for raising capital.
When is a pitch day a general solicitation?
My answer to this question is “depends what happens at the pitch day.” If the point of the pitch day is to drum up excitement about a new technology or product, then I think the event is benign. However, if someone includes a slide in the pitch deck that says, “and now that you’ve learned about our product, we’re looking to raise half a million dollars at a $2 million pre-money valuation,” you’ve engaged in general solicitation, and unless you filed a form D with the SEC at least 15 days ago, as of September 23rd, you will have violated securities laws.
The general takeaway is that pitch days should be about pitching your product, not pitching your securities. Pitch your product, make friends, make connections, and then sell your securities through private conversations. Or, know ahead of time that you are planning to file a 506(c) offering, and consult with an attorney to make sure you’re following the right steps.