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General Solicitation One Year On

General SolicitationRegulationSEC

Shriram Bhashyam   September 24, 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?

Refresher


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.

Takeaways

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.
This post is based on regulatory filings, SEC materials, and the Registry of Accredited Investors.
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EquityZen's Favorite Infographics for Startups

General SolicitationEquityZenInvestor

Phil Haslett   July 19, 2013

Like most, we are believers in "seeing" the big picture. Here are a few great infographics that visually explain different facets of the startup world:

SEC Lifts the Ban on General Solicitation (courtesy of Fundable.com)

Infographic: SEC Lifts the Ban on General Solicityation

How Startup Funding Works (courtesy of FundersandFounders.com)

How Startup Funding Works

How Startup Valuation Works (courtesy of FundersandFounders.com)


Angel Investing in Q1 2013 (courtesy of Silicon Valley Bank's Halo Report)



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SEC Lifts Ban on General Solicitation of Private Offerings

General SolicitationSECInvestorRegulation

Shriram Bhashyam   July 11, 2013

The SEC voted yesterday to lift the 80-year old ban on general solicitation of private offerings of securities pursuant to SEC Rule 506, which is commonly relied upon by private funds, startups, and crowdfunding platforms.  While you won't likely see a deluge of hedge fund and VC fund ads airing on TV during Breaking Bad or the Real Housewives of Blah Blah Blah, the largest funds (think Bridgewater or Blackstone) may start advertising strategically (e.g., the first class lounge at JFK), and social media advertising may see an overall uptick.  Startups will also be able to take greater control of their own fundraising efforts, and the crowdfunding world will also benefit from the SEC's action (although those folks are still awaiting SEC action on the crowdfunding provision of the JOBS Act).

Advertising is Unlimited, But Participation is Still Limited


Yesterday's vote by the SEC fulfilled the Congressional mandate in the JOBS Act (enacted in April 2012) to remove the prohibition against general solicitation of Rule 506 private placements.  While there is no restriction on who an issuer can solicit, sales will still be limited to accredited investors, which generally includes certain institutions and individuals who earn more than $200,000 per  year or whose net worth exceeds $1 million (exclusive of their primary residence).  In this regard, issuers will be required to take "reasonable steps" to verify that purchasers of the securities being offered are accredited investors.  Amended Rule 506 provides non-exclusive safe harbors for such verification, including:

  • obtaining (i) tax forms evidencing the purchaser's income and (ii) a written representation that the purchaser expects to earn the necessary income in the current year; or
  • obtaining a written confirmation from a broker, investment adviser, attorney, or CPA that the issuer has taken reasonable steps to verify that the purchaser is an accredited investor.

Regulation Catches Up with the Times

By removing the ban on general solicitation, the SEC has taken a crucial step in fostering capital raising and making regulation harmonious with the times.  Congress's purpose in enacting the JOBS Act was to make capital raising easier, and the amendments to Rule 506 help accomplish this by making it easier to find eligible investors.  Let's also bear in mind that the prohibition was put in place when the principal avenues for advertising were print and radio.  We live in the digital age where information is king, and the threat of violating SEC general solicitation rules by providing basic information or saying the wrong thing at a conference hamstrung companies and fund managers.  Putting the amendments to Rule 506 in the context of the SEC's recent embrace of social media, we see that the securities laws are trending in the right direction--toward modernization.

Don't expect to see an ad for the Paulson Advanced Quantitative Strategies fund in your local newspaper.  These are not the investors that private funds are targeting.  It is more likely that a well-known fund will sponsor some posh gala in the Hamptons.  Smaller funds may use low-cost avenues such as social media.  Additionally, as AdTech firms are continually pushing the limits of targeted advertising, funds may use digital advertising to target accredited investors.

Impact for Startups and Crowdfunding Portals

As the path to IPO for startups has become longer (by some measures, over 9 years now versus 5.5 years for startups between 1997 and 2001) and regulatory and public scrutiny has increased (see the recent spate of poor IPO performance by tech companies), raising capital through private markets has increased in importance.  With the lift of the ban on general solicitation, startups can now publicly announce that they are raising funds, rather than having to pursue capital in a hushed manner.

This will only be compounded by the growth of crowdfunding.  The crowdfunding space is no doubt overjoyed by the SEC's vote.  While the crowdfunding provision of the JOBS Act, which would allow companies to seek small equity investments from all investors (not just accredited investors) has yet to be implemented, crowdfunding portals can nonetheless more easily promote their offerings and match companies with accredited investors who are excited about a certain business.  By being able to cast a wider net in promoting their portals, crowdfunding websites will be able to find more accredited investors to participate on their platforms.

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The amended rules become effective as of September 23, 2013.
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