The SEC Releases Crowdfunding Rules…Now What?

SEC Crowdfunding RulesThe SEC issued its long awaited proposed crowdfunding rules yesterday. NPR asked me for my thoughts on how it might apply and what to expect.

NPR Interview

More About the SEC Crowdfunding Rules

Take a look at the SEC Draft Rules 

Then check out the SEC’s press release and fact sheet 

See the full manuscript on the Northwest Public Radio site.

A really good summary by Kevin Laws of Angel List.

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Five Reasons to Be Your Startup’s Own Lawyer

Five Reasons to Be Your Startup’s Own LawyerGuest blog post from Josh King. 

Of course you need a lawyer if you’re raising funds (and Joe is a brilliant choice for that).  And you need a lawyer if your business model revolves around something risky and untried – like publicly rating every lawyer in America.  But if you’re a startup founder, you owe it to yourself to get at least minimally educated on legal issues, so you can choose where to devote your carefully marshaled cash to legal fees, and get better value in the process.

  1. You Can Read Your Own Contracts.
    You need to read and understand your own contracts.  For the vast majority of contracts that newly-formed startups will enter into (with the notable exception of formation, investment, and loan docs), the business terms matter far more than the “legalese.”  As long as the financial terms are right and there aren’t any long-term commitments, exclusivities or other terms that could complicate a future strategic deal, there’s likely little to worry about legally.  Sure, a lot of lawyers will tell you that something could still come up and bite you.  And it could.  It absolutely could.  But that’s why you’re the entrepreneur; you’re taking that risk in exchange for not having to spend the time, legal fees and negotiating uncertainty in getting lawyers involved.
  2. You Know What’s At Stake.
    Here’s a shock: many lawyers aren’t well-trained to differentiate between those issues that matter and those that don’t.  For every lawyer who will scale his or her work to the size and complexity of the deal, some will happily spend hours arguing over and re-crafting minor provisions in small contracts.  I can’t emphasize enough that for most agreements your startup enters into, you don’t want “perfect” documents.  You want things that generally work for you, don’t unduly tie your hands, and let you get back to your business.  That’s all.
  3. It’s Easier to Be Friendly.
    Here’s a radical thought – don’t look for maximum contractual advantage in your business deals.  While many attorneys are trained to get “the best possible deal” in the form of contract terms most advantageous to their client, this is often NOT the best possible deal for your startup.  It’s highly unlikely that the legal terms in your agreement will ever matter.  But what’s 100% likely to matter is getting deals in place, having fair business terms, and establishing relationships that can help your business grow.  In the early days of your startup, that’s best accomplished using simple, fair contracts.  You’ll build trust and minimize friction – all at a minimal cost in added legal risk.
  4. Coaching is Available.
    If you’re engaged with the issues facing your business, you’ll know when you need a little legal guidance.  You’ll be far better-positioned to get that coaching – and have it laser-focused on the exact issue you’re addressing – if you’ve been the one dealing with the issues.  It’s a more cost-effective approach than tossing everything that’s vaguely “legal” over to your lawyers for review.
  5. You’ll Know What to Look for in a Lawyer.
    As your business grows, it will at some point make sense to hire a lawyer to help guide the business.  If you’ve been actively involved in the legal work for your startup, you’ll be able to tell if the lawyer you are hiring a) has the ability to differentiate between important and non-important and issues; and b) shares your attitude toward risk.

Oh, one final piece of advice – if you go this route, just don’t call yourself a lawyer.  The Bar frowns on that . . .

Josh King is Vice President – Business Development & General Counsel of Avvo in Seattle.

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Unrequested Media Coverage and General Solicitation

Unrequested Media Coverage and General SolicitationQ: If I file a Form D, as required by Regulation D, and a media outlet picks up on the filing and reports on it, have I generally solicited my offering under Rule 506?

What happened was, we raised $100,000 on a potentially $750,000 convertible debt round. The Form D required us to report what we had raised so far, and what we were hoping to raise. So, we reported we had raised $100,000 so far, on a $750,000 round. The press reported this. It also reported the name of our company, and the names of all of our officers and directors.

Now that the media reported on our offering, are we necessarily out of the 506(b) box and in 506(c), or can we still rely on 506(b) somehow?

A: Merely filing a Form D does not constitute general solicitation. The rules specifically answer this situation:

    “Provided, however, that…filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section…”

It is important to note too that the prohibition on general solicitation talks about issuers and “any person acting on [an issuer’s] behalf…” A media outlet, unless you own it or control it, is not acting on your behalf when it reports on your offering without you asking it to. The prohibition on general solicitation is quoted below.

If are conducting a Rule 506 offering, it is important that you exercise a lot of care to not generally solicit your offering, unless you intend to and are willing to take on the additional work that general solicitation entails.

Limitation on manner of offering.” Except as provided in Rule 504(b)(1), neither 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…”
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Am I Disqualified From Using Rule 506 If I Miss a Form D Deadline?

disqualifiedI was asked this question today:

“If I filed a Form D late a couple of years ago, and the proposed rules go into effect as written, they provide a 5 year look back. Does that mean I will suffer a 1 year disqualification on using Rule 506 immediately upon the effectiveness of the proposed rules?”

The proposed rules provide as follows:

(b)(1) No exemption under § 230.506 shall be available for an issuer if such issuer, or any of its predecessors or affiliates, has, within the five preceding years, failed to comply with the requirements of § 230.503 in connection with an offering conducted in reliance on § 230.506, except that such exemption shall be available for offers and sales in connection with offerings that commenced before the failure to comply occurred. In determining compliance with § 230.503 for purposes of this paragraph (b)(1), a notice on Form D (§ 239.500) or amendment thereto will be deemed timely if it is filed not later than 30 calendar days after the date specified for such filing in § 230.503, unless the issuer previously failed to comply with such a filing deadline in connection with the same offering.

But the proposed rules go on to say:

(3) For purposes of paragraph (b)(1) of this section, failures to comply with § 230.503 that occurred before [effective date of final rule] shall be disregarded.

This means that if you have missed a Form D deadline in the last 5 years, you won’t automatically be disqualified from using Rule 506 on your next financing when the rules become effective, if they become effective in their current form.

SEC Rules

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Can I Talk To the Press?

Can I Talk To the PressQ: My company is conducting a non-generally solicited offering under Rule 506(b). We have held our first closing and filed our Forms D with the SEC and various state securities departments. Now the press has picked up the Form D filing and reported about it in the paper. We didn’t talk to the newspaper that reported on it, but it they reported it anyway.

Now that the news is out, can I talk to the press about the offering, or will that blow my Rule 506(b) non-generally solicited offering status, and throw me into Rule 506(c)?

A: No, you can’t talk to the press about your non-generally solicited offering under Rule 506(b) as long as the offering is ongoing. And even after the offering is completed, you will want to exercise a lot of care in talking to the press, if, for example, you plan to conduct another offering in the near future under Rule 506(b).

It doesn’t matter that the press reported on it, based on the a Form D that you were required to file with the SEC within 15 days of the first sale.

To conduct your offering in accordance with Rule 506(b), you can’t “generally solicit” or “generally advertise” your offering.  Talking to the press about your offering would constitute “general solicitation” or “general advertising.”

If you did talk to the press about your offering while it was ongoing, that would put you in Rule 506(c), and then you would have to comply with the various obligations associated with Rule 506(c) offerings–namely:

1) Taking reasonable steps to confirm the accredited investor status of your investors, meaning reviewing Forms W-2 or similar financial statements of your investors and keeping records that you did so;

2) Checking the box that you relied on Rule 506(c) in your offering; and

3) Not taking any money from non-accredited investors.

Read my blog post The Pros and Cons of General Solicitation.

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