Startups Looking For Investment: To Advertise or Not to Advertise?

When we speak with clients about fundraising and identifying investors, standard advice usually includes avoiding general advertising and general solicitation regarding the funding round. While that may not be necessary in every case, avoiding public references to fundraising leaves companies with many more options for securities exemptions than they would otherwise have. (For an overview on securities exemptions and why an exemption is required for a private company to legally fundraise, check out this post, and for a further explanation as to what might constitute general advertising or solicitation, take a look at this one.)

However, at some point a question like the following will usually come up – The accelerator we are in is having a pitch night to close out the program, and many potential investors will be in attendance. How can I leverage this opportunity and still comply with what you told me before? Our response to this question is tailored to each client and usually involves an analysis of the risks and benefits that could be associated with the client’s planned presentation. However, it remains a gray area that can put startups (not to mention accelerators and securities attorneys) in a tough position.

However, this spring, the U.S. Securities and Exchange Commission published a report proposing amendments that would simplify and clarify the framework related to this difficult question. A specific rule would be added to the current framework that would specify what can and cannot be done at pitch nights, demo days, and similar events – as opposed to relying on somewhat unclear prohibitions against “general advertising” and “general solicitation.” While these proposed amendments are not law yet, keep these potential changes in mind so that you can not only comply, but use them to your advantage when and if they do pass.

Under the proposal, an issuer (e.g., a startup company) would not be deemed to have engaged in general solicitation or general advertising if a few requirements are met:

• The communications are made in connection with a seminar or meeting by a college, university or other institution of higher education, a local government, a nonprofit organization, or an angel investor group, incubator, or accelerator sponsoring the seminar or meeting.
• The sponsor (the organizations listed above) could not make investment recommendations or provide investment advice to attendees, nor engage in any investment negotiations between the attendees and issuers. Further, the sponsor could not charge attendees any fees for attending the event (except reasonable administrative fees), nor receive compensation for introductions between attendees and issuers.
• The advertising for the event and information conveyed at the event would be limited to (1) notification that the issuer is in the process of offering or planning to offer securities; (2) the type and amount of securities being offered; and (3) the intended use of the proceeds of the offering.

The SEC was accepting public comments on these proposed rules until June 1, 2020, so we anticipate that any final rules would not go into effect until the fall at earliest (and the final rule will likely contain more definitions and specifics). For now, we consider it a positive development that the SEC has proposed rules to clarify with this ongoing gray area and we look forward to keeping you updated on the final regulation.

If you have any questions for us in the meantime, please feel free to reach out.