The new proposed SEC Amendments to Regulation D, Form D and Rule 156 under the Securities Act are available for review. What you'll find after reading them is there are many good things in there. For example, the ability to generally solicit or advertise for investors to participate in financing a new venture. This is a huge change for what have always been private transactions where qualified investors were discovered through handshakes and not thirty second flashes in between super bowl touchdowns. The world will change for hedge funds with plenty of money to spend on these advertisements. It will also change for many retail investors who don't even realize they are qualified investors as they begin to find investing in hedge funds isn't any better than investing with private wealth managers or stock market index funds.
The biggest change in my world will be for early stage companies and the funds that invest in those companies. For a small early stage company - you know the ones that create all the jobs in the country - the rules for private investment are MUCH harder. When you read the proposed rules, you'll find two components that have an impact. The first being the clearest to interpret is a change that anyone raising money and generally soliciting for qualified investors has a larger burden to validate that the investor is indeed qualified. This is fairly clear in the proposal and will add time and capital overhead to the fund raising process. Granted platforms like Angel List or any of the other crowdfunding and investor resources I've previously mentioned will step up to provide services for this validation. The overhead will still be new and the cost of doing business higher as a result of the proposal going into effect, but the net benefit will be a little greater.
The second is a little harder to interpret and would require early stage companies (you know the ones with virtually no time and money to spare) will have new filing requirements if general solicitation is a part of their fund raising process. Of course with new filing requirements come new penalties that could result in a new startup being restricted from fund raising for at least a year if they accidentally miss a filing. Think about this...
If you are an early stage company trying to raise enough money to build your product, service, or whatever you will have to file your intent to begin fund raising prior to any general solicitation – general solicitation could include a mention you are raising funds in a demo, a mention you are raising funds in a meeting with people you have NOT validated, a mention on your blog, twitter account, etc. – you will have already had to have filed your forms stating that you are going to raise funds and generally solicit. Of course you’ll also have to register every slide, tweet, blog post, etc. that mentions the intent to raise funds. Not to mention the ongoing filing stating that you are still raising funds and haven’t yet closed your round. This is incredibly different than today - under the current rules without the proposed changes you only have to file after you have your funding secured – meaning you can talk to 100s of investors who you haven’t totally verified, get some of them to sign a form stating they are qualified, get some of them to write a check, and then go file that you raised money.
If you end up generally soliciting and haven’t filed yet… well you can ask for forgiveness one time or get stuck in violation and if your caught your fund raising could be caught for 1yr.
You also have the problem that you have publicly committed to raising money the moment you file. If you have to file before you raise (instead of after as you do today) it will be public knowledge that you are trying to raise – whether or not that raise is successful.
This part could be incredibly cumbersome for entrepreneurs or at least incredibly expensive on the legal side and it isn’t a burden that can easily be shifted to a platform like AngelList or onto the angels themselves. It is a burden that the entrepreneur needs to manage and is the reason so many people are up in arms about the proposal. Check out William Carleton's great post on his blog titled SaveRegD. Here he outlines the growing movement to comment on the regulations and the articles by many folks who are starting to voice their opinions. Here is another great post by Katherine on the Seattle Angel Conference blog titled The Jobs Act- The Hidden Grenade for Angel Investing. Yet another by Wendy Ceccherelli titled Startup Capital.
These are the largest issues I personally have with the proposal:
- The act of general solicitation is not clear and well differentiated from a discussion of the business and/or product. This leaves companies and funds in a difficult position when deciphering if and when they would be in violation of the rules. Obviously those super bowl ads would be general solicitation - but is a pitch at a demo event general solicitation?
- The penalties for being in violation of the rules are incredibly steep considering the difficulty in discerning where the line in the sand is for being in violation of them. Accidentally violating the rules could result in being barred from raising funds for at least 1yr.
- The ongoing filing of any content related to general solicitation and the ongoing filing during the fund raising process is burdensome and puts an early stage company at a disadvantage due to the cost of managing the filings and due to the disclosure of a fund raising process that may or may not have closed. Meaning future investors will know the company was unsuccessful at raising money if they fall under these rules.
This is not to say that these are the only issues. I'm sure you'll find others that you would also like to see changed. The list of parties interested in getting this proposal changed is growing rapidly and commenting is simple. There are nineteen official comments filed so far and the SEC truly does read every one of them. If we add enough thoughtful comments to the list, there is a chance to adjust some of these rules.
Feel free to read the full proposed Amendments to Regulation D, Form D and Rule 156 under the Securities Act or Joe Wallin's WSJ article Time to Advertise Your Private Offering? Not So Fast or William Carleton's TechCrunch article Let's Have General Solicitation As Congress Intended It to get a sense for what is wrong with this proposal and then commenting is simple.
All YOU have to do is fill out this simple form and hit the submit button.