Innovation Up In Flames

Your Idea (2)Thanks to the SEC, you may inadvertently blow up your next company.

Here is how it could happen.

You come up with an idea. You talk to some friends about it. They convince you to apply to pitch at an upcoming weekend pitch competition. A bunch of VCs, angel investors and other folks are going to be there.

You go and do your thing. Your pitch is well received, despite the fact that you didn’t know what you were doing. Some friends and other folks who are there helped you. It was great fun. A thrill.

A few weeks goes by. You have been receiving emails and some phone calls from folks who wanted to follow up with you. You knew you would need a lawyer, but not until you knew your idea could fly.

About two weeks later, one of the angels who attended the pitch event wants to invest, and you reach agreement with him on terms. The valuation is roughly what you suggested it would be in your pitch.

You call a lawyer. She asks you if you filed an Advance Form D before pitching at the public event. You wonder what the heck she is talking about. None of your friends in the startup community told you about any “Advance Form D” filing.

She tells you that since you didn’t file the form 15 days before you pitched, and didn’t cure your failure to file within 30 days after missing the 15 day advance filing deadline, you are screwed.

    “You are in the 1 year penalty box,” she says.
    “What do you mean,” you ask.
    “I mean,” she says, “that after this round you won’t be allowed to rely upon Rule 506, the most commonly used securities law exemption for startups, for a year after this round closes.”

You feel terrible. You wish someone had told you. You also wish the SEC hadn’t seen fit to put such a rule in place in the first place.


If you are new to the startup ecosystem, please be aware that it has always been illegal to generally solicit or advertise your private securities offerings. This has changed a little recently with the enactment of the JOBS Act and the SEC rules that have just come out in connection with the JOBS Act. However, as I wrote in a blog post recently published in the Wall Street Journal, generally soliciting or generally advertising your securities offering is fraught with difficulty. Always consult counsel before you proceed. Please don’t turn out like the character in this story. Do not assume the law in this context is easy. It is not, unfortunately.

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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