Enough Already, We Think We Understand General Solicitation

The general solicitation rules have been in effect for about a month now (they became effective on September 23rd) and most lawyers I know are getting comfortable with them.  As a fund manager, startup advisor, and instigator in the Seattle startup community, I too am beginning to feel comfortable with the rules and am ready to start using them and worrying about other things.

If you are raising money for your startup, real estate project, or investment fund you too should be beginning to feel comfortable with the rules and be ready to actually start moving forward and putting them in use. Using the rules is a choice between public general solicitation and private solicitation.  Once you decide how you want to proceed, you will have to follow the rules governing your choice and file your Form D accordingly. That’s it, just pick generally solicit or not and then follow whichever rules you’ve chosen.

Sounds great and all, but when exactly should I be willing to pay the fee to talk to your lawyer?

Remember that there are penalties for screwing this up and so it is important to keep your lawyer in the loop. I wouldn’t recommend winging it. Remember if you do it wrong, you could be defending in a lawsuit or worse, an investigation by securities regulators.

In the simplest terms, if you are getting started raising capital, have been raising for a while, or are going to start within a few months, you need to think about how you are communicating your fund raising activity. If you are going to communicate openly and publicly inviting anyone to invest (even if you are only allowing qualified investors in), generally you can do so under the 506(c) rules. If you are going to communicate privately to qualified investors that you know or are personally introduced to, you can do so under the 506(b) rules.

What does that mean exactly?

You need to file under 506(c)…if….

  1. You are pitching your securities offering at a demo day that is open to the public and you discuss your open fund raising activity.
  2. You talk or write about your open fund raising process (e.g. talking about activities with investors, angel/VC meetings, etc.) openly to the public.
  3. Your investors, potential investors, partners/advisors, or conference organizers publicly write or talk about your open fund raising activity.


You can file under 506(b) after your raise is secured….if….

  1. You don’t do any of the above activities.
  2. You limit your solicitations, your pitches to people with whom you have a pre‑existing substantive relationship.


But what if one of your friends introduces you to someone?  Is it OK?  It should be.

If you skimmed through the situations above, you are probably wondering about pitching at a public demo day. The truth on this one may hurt a bit, but if you are going to pitch (including details on your raise) at a demo day, conference, etc. that has been announced publicly, you will very likely fall within 506(c).

Filing under 506(c) has a variety of requirements that filing under rule 506(b) does not have, the overhead of meeting these requirements is a downside.  In addition, prospective investors may walk away when you ask for their personal financial statement to verify their accredited investor status.

Ok, so how do you file?  Seriously, I recommend you figure out where you fall and then give your lawyer a call. Personally I have worked with Joe Wallin who writes prolifically on the topic at http://www.startuplawblog.com, he is well versed in the rules and can guide you down the right path.

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  1. Pingback: Rules for Demo Day Organizers | Josh Maher's Blog

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