There is a lot being written in the press and in the blogs right now about the SEC lifting the 80-year old ban on general solicitation of private companies’ securities offerings.
There is a lot of excitement about the possibilities.
We will soon be able to use Twitter, and Facebook, and Tumblr, etc., to seek investors for our startups, right?!
Well, not quite.
On the same day that the SEC issued the final rules lifting the ban on general solicitation, the SEC also issued proposed rules which are going to make the whole business of a private company securities offering much more complex and expensive.
You can read the PROPOSED RULES HERE
And you can comment on them HERE
One of the aspects of the proposed rules that hasn’t drawn a lot of attention in the blogs and press is the new legend requirement. What is a legend? A legend is a specifically required disclosure; frequently in all caps or bold, or called out in some other manner from other text in a document so that it is less likely to be missed.
For example, you might find on the top of your convertible note the following legend (this one from TechStars.com/docs):
THIS CONVERTIBLE PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER SATISFACTORY TO COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
The SEC’s new rules on generally solicited offerings are going to require inclusion of lengthy legends in any written communication that constitutes a general solicitation or general advertising, “in a prominent manner.”.
These legends exceed 140 characters.
So, will you be able to use Twitter to seek out investors? It appears not, unless the SEC responds to comments of readers like you and revises its proposed rule.
Here is what the SEC’s proposed rules actually say:
An issuer shall include, in a prominent manner, the following legends in any written communication that constitutes a general solicitation or general advertising in any offering conducted in reliance on § 230.506(c):
- The securities may be sold only to “accredited investors,” which for natural persons are investors who meet certain minimum annual income or net worth thresholds;
- The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;
- The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;
- The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
- Investing in securities involves risk, and investors should be able to bear the loss of their investment.
What can you do if you don’t like this result? If you don’t want the SEC to come down in this way and prohibit the use of Twitter as a fundraising tool?
Submit a comment to the SEC. Don’t wait. The comment deadline will come sooner than you think (September 23rd, to be exact).