The Rule Against Entrepreneurs

You may have heard of the Rule Against Perpetuities. Maybe. If you went to law school. It is an absurd old rule, crafted by the English common law courts years and years ago.

But have you heard of “The Rule Against Entrepreneurs”?

Maybe not, because I am just coining the phrase right now.

Let me explain what I mean

If You Are An Investor, You Can Advertise That

If you are a venture capital fund, you can put up a sign on the side of the road which says–”Come to us startups. We have billions of dollars to invest in you. We are looking for the few, the select few, who are awesome.” This is a good strategy. This way, if you have the money, you can take a look at thousands of businesses before you decide which few you will invest in–increasing your likelihood of success.

But if you are an entrepreneur, and you put up the same sign, but it says: “Come to me. I have a startup. I need to raise money to grow my business and hire employees.” You will have violated the law and might go to jail. The SEC takes this sort of thing (a transgression in their eyes) very seriously.

This is what I mean by the “Rule Against Entrepreneurs.” (In keeping with the absurdity of this rule, hereinafter the rule will be referred to herein as the “Rule”)

The Rule gets even more ridiculous. It doesn’t just prohibit road signs. It prohibits putting on your company’s website a statement that you are raising money. It prohibits responding to a reporter’s inquiry–”Are you raising money?” Don’t say yes! If you do, and the reporter reports it, you might blow your securities law exemption.

The Actual Text of the Rule

Here is the actual text of the rule:

[N]either the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;

If you want to read the rule yourself, you can find it at this link: http://taft.law.uc.edu/CCL/33ActRls/rule502.html

Read The Rule Carefully

Read section 2 above carefully. If you are pitching for money at an event whose attendees have been invited by any general solicitation or advertising, you have violated the rule!

“Wait a minute,” you might say. “Doesn’t this happen all the time?” And I would say something lawyer-like, like, “Yeah, but that doesn’t mean it doesn’t violate the rule.”

“But wait!” you’ll say, “Didn’t the JOBS Act change this? Didn’t the JOBS Act say that entrepreneurs could generally advertise in all accredited investor Rule 506 offerings?”

And I’ll say, “Yes, it did, but not until the SEC Acts, and the SEC hasn’t got around to it yet. The last SEC commissioner apparently was ideologically opposed to repealing the Rule Against Entrepreneurs. So now we wait. And wait. And wait….”

Conclusion

When will we see Congress finally unleash the full power of the American entrepreneurial community? Probably never. It is a weird incongruity in our law. It is the startups that create the jobs. But the laws favor the money, not those seeking the money.

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  • pjpronger

    How do college business plan competitions get around the rule? They advertise, admit the public, and the pitches normally include an “ask”.

    • http://startuplawblog.com/joewallin Joe Wallin

      If they are truly raising money in those venues, then it sounds like they aren’t complying with the technical niceties of the rule.

  • TPowers

    Is there a first amendment argument to be made here against the status quo? Why is Capital Raising speech subject to self censorship and heavier penalties than almost any other type of utterance?

  • http://www.myercorplaw.com/ John A. Myer

    Great post, Joe. For non-lawyers reading this discussion, the reason the SEC is reluctant to move forward on advertising is that the only difference between a public offering (which needs to be registered) and a private placement is privacy. Well once start-ups can advertise, there is no privacy. But a narrow exemption for start-ups can surely be devised, and Congress tried with the JOBS Act. The problem is that just as the SEC has been delegated responsibilities for implementing the law, the SEC needs to draw in FINRA, which reports to the SEC and is responsible for all the stock brokers. The brokers would love to help, but they are still wearing regulatory manacles. Also, NASAA (the organization of the state securities regulators) needs to be consulted. Yes, Rule 506 per-empts state law, but all the investment advisers, who might take a shine to one start-up or another, need to comply with state law (if they manage under $100 million.) The SEC probably feels that if Congress wants them to do all that, it ought to give them some funding. The point is that finance has a complex regulatory system and any changes cause ripple effects that require getting a lot of folks on board. The complexities of this task seem to be alluding the staff of the SEC.

    • http://startuplawblog.com/joewallin Joe Wallin

      Thanks John. We live in a legislative and regulatory morass. It is time we weed the garden!

 
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