“Demo Days” and General Solicitation

demo days and general solicitation1I’ve been writing an article on general solicitation, a long one, and doing a lot of research.  As part of that, I found the attached SEC No-Action letter that I wanted to share with everyone, because it directly hits on the question of whether “demo days” constitute general solicitation.

This has been a hot button issue for a lot of people.

You might recall that at the open meeting of the SEC’s Advisory Committee on Small and Emerging Companies held on Tuesday, September 17, 2013, that SEC staff refused to answer the question whether demo days constituted general solicitation.

Watch the SEC HEARING

(The key part starts at the 52:00 minute mark.)

Those who made comments to the SEC’s proposed Reg. D rules have also voiced alarm over the rules’ potentially adverse impact on demo days – a great thing in the startup ecosystem.  Mitch Kapor had this to say:

Practices that have worked well without incident for decades could suddenly become unintentional minefields for honest startups and sophisticated investors alike.  Demo days, where startups present to investors and press, will most certainly be called “general solicitation” by the law firms advising startups (and likely by SEC enforcement as well).  This means that some of the most high profile ways new startups raise money transparently may now cause those same startups to go out of business if the penalties are enforced.

Read the attached SEC No Action Letter, Michigan Growth Capital Symposium (May 4, 1995).  In the letter, the SEC concurs that presenting companies at the symposium won’t be deemed to have generally solicited. However, there are a number of key predicate facts that the SEC relies upon in reaching that conclusion, including “no specific financing details are a part of presentations made at the symposium and no private placement materials are distributed there…”

It is a helpful no-action letter, but I don’t think it will stop the debate.

Michigan Growth Capital Symposium SEC No-Action Letter (May 4, 1995)

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • Henry Glover

    Everyone is in agreement that demo days happen and have been happening for years. In the video they state that every one violates but they just ‘sit back and watch’…

    IMO, because demo days have been open and they sit back and watch, it now becomes an accepted practice becomes a safe harbor by default.

    I know it is different but if someone squats on my land and I don’t do anything about it, someday my case to ownership of my land back is gone.

    So at what point are demo days considered “openly, continuously and hostilely”

    If demo days were not a problem before I don’t see why they would be ‘elected into a 506(c) bucket’ now.

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

      Henry, yeah, I wish I could agree, but I don’t think non-enforcement can establish an interpretation of the rules that is favorable to private industry. What did Oliver Wendell Holmes say, “Men must turn square corners when working with the government.”

      • Henry Glover

        Thanks yeah that makes sense. I havent heard that quote – very true.