General Solicitation One Year On
Sep 24th, 2014
September 23, 2014 marked the one year anniversary of the SEC lifting it's then 80-year old ban on general solicitation. The adoption of this stance was met with a lot of fanfare, but one year on, what has been the practical effect?
Let's start with a quick primer. Before last year, general solicitation of unregistered securities offerings was prohibited. General solicitation is a term of art that is not clearly defined in the SEC regulations that prohibit it. The definition of general solicitation is an amalgam of SEC rules, interpretive letters, no action letters and other guidance. More on that here. At its most basic level, the old prohibition meant that anyone raising capital through an unregistered offering could not generally advertise that they are raising, such as via tweet, website post, TV ad, etc. Demo days were a big question mark in all of this. Much of the VC and startup world has traditionally raised capital through unregistered offerings (technically, Rule 506(b) private placements). Last year's rule means that private funds and startups can shout from the roof tops that they are raising money, as long as they verify that ultimate purchasers are all accredited investors.
Data and Milestones
The data on this is scant, but here's what we know about how general solicitation has gone in the last year. We've highlighted some key facts and milestones below.
- As of the end of Q1 2014, 900+ offerings were conducted in reliance on the general solicitation exemption ("506(c)"). Of those:
- 650+ successfully raised capital.
- The largest cohort was pooled investment funds.
- As of the end of Q1 2014, $10+ billion in capital was raised via generally solicited offerings.
- Over the same period, over 9200 offerings relied on the old, "private" offering structure.
- Over the same period, those traditional offerings raised over $233 billion in capital.
- Through February 2014, 75% of 506(c) filers were looking to raise under $10 million, and 40% of 506(c) filers were raising $1.5 million or less.
- Through February 2014, 35 generally solicited offerings were seeking to raise over $100 million.
- ff Venture Capital was the first institutional VC fund to use general solicitation to raise capital. It did so with a blog post announcing the launch of its third fund.
- Since that time, 500 Startups, Scout Ventures, and NIN Ventures have engaged in generally solicited offerings. At least 500 Startups (full disclosure: they're an investor in EquityZen) and Scout were assisted by SeedInvest, the prominent crowdfunding platform, in their 506(c) offerings.
Based on the limited data available, here are the salient points:
- Adoption of general solicitation has been slow and limited. The old-school 506(b) offerings still dominate private placement offerings. There are a few key reasons for this, which are beyond the scope of this post. If interested, please ask in the comments section and we'll address them.
- Of those who have adopted it, the 506(c) offering is most favored among those issuers seeking to raise relatively small amounts. Perhaps the really large funds already have in place the required relationships, clout, and reputation to avoid the hassle of a generally solicited offering.
- Venture funds are starting to come around. While ff jumped in a few weeks after the adoption of the general solicitation rule, 500, Scout, and NIN all joined in 2014. As AngelList continues to carry the torch on public fundraising for startups and syndicates, we can expect to see up and coming micro VC funds and super angels leverage crowdfunding platforms to expand their fundraising reach.