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Meetup Thoughts Regarding Proposed Reg D and Form D Rules

meetupAt a meetup yesterday, someone asked me to comment on the proposed SEC rules regarding Reg D and Form D. Here is what I jotted down on the spot as comments someone could submit to the SEC:

    (1) The spirit of the JOBS Act was to make it easier for startups to raise money.
    (2) Your proposed rules will make it much, much harder for startups to raise money.
    (3) Your proposed rules create a lot of traps for the unwary. Many startups will inadvertently violate these rules and then be disqualified from raising money for a year. This will actually hurt the economy.
    (4) The SEC has not done a good job of defining what actually constitutes general solicitation and general advertising, yet proposes to automatically disqualify companies from using Rule 506 for a year if they don’t file an Advance Form D 15 days before generally soliciting. This is totally unfair to companies.
    (5) Demo days and investment forums and similar events are good for America. I think the point of the JOBS Act was to countenance these events. But your proposed rules would essentially make them illegal because many founders of startups will miss the Advance Form D filing inadvertently. This result is directly contrary to the spirit of the JOBS Act.
    (6) You are asking startups (many of which have very limited financial resources) to spend thousands of dollars filling out forms before they have raised any money. This is unfair. Many startups that go out and try to raise money never succeed in doing so. This is another reason the post-sale Form D makes more sense than a pre-filing.
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What Is The Single Worst Change In the Proposed SEC Rules?

 

Worst Change in SEC RulesWhat is the worst thing about the SEC’s proposed rules?

    Is it the requirement that lengthy legends be prominently displayed on all written general solicitation material? Nah. We can live with this requirement.
    Is it the requirement to file a terminating amendment to the Form D on the closing of a financing? Nah. We can suffer through this one as well.
    Is it the requirement to file all written general solicitation materials with the SEC before their use? Nah. We can figure this out and comply.
    Is it all the additional information we will have to put on Form D? Again, nah. We can struggle through that.
    Is it the imposition of additional filing deadlines? Again, these are painful, and will increase our legal expenses as we do offerings. But again, this isn’t the worst of it.
    Is it the penalty box? The 1 year we have to sit out if we miss a deadline and don’t cure? This one is really draconian.

Although it’s a close call, I think the new requirement that is even worse than the 1 year penalty box is the requirement that companies file the Advance Form D 15 days before generally soliciting.

The 15 day advance filing deadline is going to trip many companies up. For my money, after considering it, I think this is the worst feature of the new rules. And if there were only one thing I could ask the SEC to change, I would ask that they change this. I think a 15 day deadline AFTER the date of first sale is fair. Does anyone (including the SEC) actually think the SEC is going to review filings and do anything to protect the public during the 15 day advance filing period? I doubt it.

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You Can’t Tweet That

Can't tweet thatThere 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):

  1. 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;
  2. 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;
  3. 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;
  4. 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
  5. Investing in securities involves risk, and investors should be able to bear the loss of their investment.

Conclusion

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).

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