Why Is September 23rd An Exciting Day?

SEC rule 506On September 23rd something very important happens.

For the first time since we’ve been alive (at least, most of us), private companies will be able to generally solicit and generally advertise their all accredited investor Rule 506 securities offerings.

Yes, if you want, subject to certain conditions, you can run an ad in the newspaper, buy a TV spot, or even put up a roadside sign.

A big note of caution, however:  Please be aware that the SEC has issued proposed rules which might become effective shortly after September 23rd (we don’t know yet when and if they will become effective) that may change all sorts of things–Advance Form D filings, legends, filings of offering materials with the SEC, etc. Also, always consult a securities attorney before generally soliciting your securities offerings. There are a variety of reasons that you might not want to generally solicit your offering even though you can, such as an inability to fall back on 4(a)(2), state securities law complications, and other problems which I won’t summarize here, but feel free to email me if you would like to discuss.

Advertising Regulation D securities offerings hasn’t been legal since, well, forever.

But in the JOBS Act the Congress directed the SEC to repeal its regulations prohibiting general solicitation and general advertising:

1) in all-accredited investor Regulation D Rule 506 offerings

2) provided that the issuer took “reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”

New SEC Government Investor Rules

What are “reasonable steps”?

Well, it depends. If your investors are individuals, you will be deemed to have taken reasonable steps if you use one of four (4) methods of verifying accredited investor status summarized below.

You don’t have to use one of the below four methods with respect to individual investors, but you may prefer to.

In anticipation of September 23rd, please keep the following in mind:

(1) If you generally solicit, you are going to have to check a box on your Form D indicating that you generally solicited your offering.

(2) You won’t be able to rely on just a certification from your investor that he/she/it was accredited. You will have to take reasonable steps to verify that they are accredited.

(3) You will have to keep good records so that you can prove that you took reasonable steps to verify that your purchasers were accredited. (As the SEC said: “Regardless of the particular steps taken, because the issuer has the burden of demonstrating that its offering is entitled to an exemption from the registration requirements of Section 5 of the Securities Act, it will be important for issuers and their verification service providers to retain adequate records regarding the steps taken to verify that a purchaser was an accredited investor.”)

(4) If you generally solicit, you are very likely giving up an important legal fall back position, Section 4(a)(2), the non-public offering securities law statutory exemption.

(5) The SEC has proposed new rules on generally solicited offerings that threaten to upset the whole deal Congress struck, and which everyone is so excited about. And so you might not want to do anything on September 23rd except wait until the regulations shake out.

The Four Methods

For individual investors, you will be deemed to have taken reasonable steps if you use one of the following four methods.

1) For investors accredited on the basis of income, you review their tax returns, a Form W-2, a Form K-1, or a Form 1099 for the two (2) most recent years and obtain from them a written representation that they have a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.

2) For investors accredited on the basis of net worth, you review one or more of the following types of documentation dated within the prior three (3) months and obtain a written representation that all liabilities necessary to make a determination of net worth have been disclosed:

(i) With respect to assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties; and

(ii) With respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies.

3) You obtain a written confirmation from one of the following persons that they have taken reasonable steps to verify that the purchaser is an accredited investor within the prior three (3) months and have determined that such purchaser is an accredited investor:

(i) A registered broker-dealer;

(ii) An investment adviser registered with the Securities and Exchange Commission;

(iii) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law; or

(iv) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office

4) For accredited investors who purchased your securities before September 23, 2013, and who continue to hold such securities, for any new purchases in your 506(c) offering, you obtain a certification by such person at the time of sale that he or she qualifies as an accredited investor.


September 23rd will be an exciting day. But before you get too excited, please also be aware that on the same day, September 23rd, the comment period on new SEC rules expires. Those rules are going to potentially take away a lot of the gains represented by the rules I just described above. I wrote a piece in the Wall Street Journal on this. You can find that piece here: Time to Advertise Your Private Offering? Not So Fast.

For additional information on how the proposed rules might work and interplay with the rules that go live on September 23rd, you might find this letter from the SEC Chair helpful. In it, she says this:

You also expressed concern that the issuance of the July 10th rule proposal may have created uncertainty among some issuers and market participants as to whether the new Rule 506(c) exemption, which permits general solicitation, can be used once it becomes effective. The Commission approved the adoption of Rule 506(c) on July 10, 2013, and the rule will be effective on September 23, 2013. Once effective, issuers will be able to rely on the Rule 506(c) exemption for securities offerings as long as they comply with the conditions ofthat exemption. Issuers are notrequired to complywith any aspect ofthe Commission’s July 10th rule proposal until such time as the Commission may approve a final rule and such rule becomes effective. Should the Commission ultimately decide to adopt final rules, I expect these rules would consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted the Rule 506(c) exemption.

Posted in Federal Law & Regulation, Financings, Startup Law | Tagged , , , , , , , , | 1 Comment

The SEC’s Proposed Reg D Rules: Why We Care

Reg D Why We CareThe SEC has proposed new rules to govern angel and venture financings.

If you are not familiar with the securities law, Rule 506 of Regulation D is the most commonly relied upon securities law exemption for early stage companies raising money from angels and venture capital firms.

Currently, Rule 506 offerings are miraculously free of much regulation. As long as a financing is raised solely from “accredited investors,” no specified form of disclosure is required. A Form D must be filed, after the first sale, with the SEC and with each state in which the company or investors are resident, but the Form D is not that difficult to complete. AND the form isn’t due until 15 days after a company receives commitments from investors or closes on funds. In addition, right now, under the current rules, an inadvertent late filing with a reasonable excuse doesn’t jeopardize the exemption (at least at the federal level.)

The proposed rules, if they go into effect as the SEC has proposed them, will change many practices that have grown up and evolved over the last several years that are beneficial to the early stage company ecosystem.

For example, the new rules are going to require companies to file Advance Forms D at least 15 days before they conduct any general solicitation or general advertising.

What is the problem with this? The law doesn’t define what constitutes general solicitation or general advertising. (A fact that the SEC reiterates in its recent rules.) Instead, the law merely provides some examples of what constitutes general solicitation. What types of activities can put a company in the general solicitation box are not always clear. The concept is nebulous at the edges.


Not only do the proposed rules require an Advance Form D filing, they impose a severe penalty on companies if they fail to timely file–disqualification from using Reg D Rule 506 for one year after the closing of the offering in which the failure to timely file occurred.

This new advance filing requirement, the lack of good definition in the law as to what constitutes general solicitation, and the onerous “penalty box” provision are a lethal combination for the early stage company ecosystem.

The penalty box is especially lethal because it binds founders. If you screw up with your first company, your next company is stuck too.

If the SEC had tried to dream up a way to throw a wrench into the early stage company ecosystem, it would have had a hard time coming up with something better than these proposed rules.

What about startup weekends? What about business plan competitions? What about incubator demo or graduation days? Will the teams that compete in these events be deemed to have generally solicited an offering? Some of these events, if conducted as they’ve been run in the past, will clearly constitute general solicitation.

Jean Peters, a member of the Board of Directors of the Angel Capital Association, made this comment recently on my blog, and the more I think about it the more I appreciate it:

    “Graduate high school. Check. Take SATs. Check. File Advance Form D for startup: World Domination.”

The SEC’s proposed rules are truly unfortunate. This 1 year penalty box could seriously harm startup companies that inadvertently miss filing deadlines.

What can you do?

Read the SEC rules.

Comment on the SEC rules.

Don’t miss your chance to comment. Your comment might be the one that turns the SEC around.

If you are looking for inspiration, read Naval Ravikant’s brilliant comment letter to the SEC. You may also find the site saveregd.org helpful. The Angel Capital Association also has a really good resource page.

Some suggestions for comments to the SEC:

  1. No advance filing should be required; filing within 15 days of first sale is sufficient.
  2. In fact, please, SEC, consider lengthening the 15 day period to 60 days.
  3. The penalty box is horrendous. There should be no penalty box.
  4. Instead of a stick approach, the SEC should consider a carrot approach. If you advance file, you should get an automatic forgiveness on any penalty box. Or if you are in a penalty box, a 30 day advance filing in your next financing should forgive you.
  5. Don’t forget SEC, to fix the inequity written about by @danshapiro in TechCrunch.
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Help Define Accredited Investor

Accredited investorThe SEC has requested comment on the definition of accredited investor. This request for comment appears in the SEC’s proposed rules on Regulation D and Form D.

Apparently the SEC is readying to change the definition, perhaps in a way that will hurt the startup community.

The SEC said this, in its proposed rules: “Many commenters stated, and we agree, that the definition of accredited investor as it relates to natural persons should be reviewed and, if necessary or appropriate, amended.”

Here are the questions they specifically asked commenters to answer.

  1. Are the net worth test and the income test currently provided in Rule 501(a)(5) and Rule 501(a)(6), respectively, the appropriate tests for determining whether a natural person is an accredited investor? Do such tests indicate whether an investor has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of a prospective investment? If not, what other criteria should be considered as an appropriate test for investment sophistication?
  2. Are the current financial thresholds in the net worth test and the income test still the appropriate thresholds for determining whether a natural person is an accredited investor? Should any revised thresholds be indexed for inflation?
  3. Currently, the financial thresholds in the income test and net worth test are based on fixed dollar amounts (such as having an individual income in excess of $200,000 for a natural person to qualify as an accredited investor). Should the net worth test and the income test be changed to use thresholds that are not tied to fixed dollar amounts (for example, thresholds based on a certain formula or percentage)?

If you are interested at all in this question, and the vibrancy of the startup community as a whole, I encourage you to answer these questions, and submit your answers to the SEC.

In addition, if you are interested in the issue of startup equality for same sex couples, which Dan Shapiro wrote about so eloquently in TechCrunch, now is the perfect time to articulate your opinion on this issue to the SEC as well. For more information on this issue, below are some helpful links:

Same-Sex Couples Face Higher Bar to Make Angel Investments.


The Mission of StartupEquality.org

Posted in Financings | Tagged , , , , , , , , , | 11 Comments

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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What Do the SEC’s Proposed Reg D Rules Actually Require?

SEC reg D rule requirements

You might be wondering – what exactly do the SEC’s proposed changes to Reg. D and Form D actually require? I have put together the below distillation in an attempt to summarize the changes in one page.
The proposed rules make the following six fundamental changes to Reg. D and Form D:

  1. They require the filing of a Form D in Rule 506(c) generally solicited offerings at least 15 days before the issuer engages in general solicitation. As a practical matter, because the Form D is going to require a lot more information once these rules are effective, companies should plan to start working on Forms D with their professional advisors at least 30 days in advance of their first general solicitation so that they can be sure to make the 15 day deadline. For example, a company wants to participate in a public Demo Day on March 15th. The company should start working with its lawyers in February to be sure to make the deadline.
  2. They require the submission of written general solicitation materials used in Rule 506(c) offerings to the SEC before their use. Under the proposed rules, companies are going to have to submit their materials to a private SEC website—not EDGAR.
  3. They disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply within the last 5 years with Form D filings requirements in a Rule 506 offering. For example, if you miss a 15 or 30 day filing deadline, and you don’t cure the miss within 30 days, you won’t be able to use Rule 506 on your next offering for 1 year after your current offering. If you miss a 15 or 30 day deadline, but cure it within 30 days, you are OK—but you only get 1 cure per offering. So if you miss another 15 or 30 day deadline, you are in the penalty box.
  4. They require substantial additional information to be included in Form D. Republican Congressman Scott Garrett (5th District, New Jersey) calls this a “wildly-expanded Form D.” http://garrett.house.gov/press-release/congressmen-mchenry-garrett-send-letter-sec-chair-white-questioning-legality-proposed
  5. They require written general solicitation materials used in Rule 506(c) offerings to include specific legends. The legends are prescribed in the rules. They are lengthy. They exceed Twitter length.
  6. They require the filing of a closing amendment to Form D after the termination of any Rule 506 offering.

Helpful Links:

The draft rules

Comment on the draft rules

A letter critical of the proposed rules from two Congresspersons to the SEC

Comments submitted to this SEC so far

Angel Capital Association held a webinar on August 6, 2013

See also Save Reg D

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