EquityZen Knowledge Center

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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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General Solicitation: The Elephant in the Demo Day Room

General SolicitationInvestor

Shriram Bhashyam   September 26, 2013

Yesterday, the Entrepreneurs Roundtable Accelerator had its coming-out party for its latest batch.  With a wink and a nod, the ERA demo day, one of the first since the new SEC rules allowing general solicitation went into effect on September 23, side-stepped the general solicitation issue.  As general solicitation is indeed still very new, it will be interesting to see where the dust settles on how accelerators and incubators deal with the issue.


General solicitation is one of the murkier waters in the sea of securities laws. How murky? For starters, the SEC's Regulation D does not define general solicitation. In fact, in the release adopting the final rule lifting the ban on general solicitation, the SEC admitted as much (see pages 6-7 of this dense document, or just take our word for it). That leaves the startup world with the following sources of guidance on general solicitation:
  • SEC rules;
  • SEC interpretations;
  • SEC enforcement actions;
  • SEC "no action" letters; and
  • case law.
Long story short: these sources do not squarely address whether a demo day is a general solicitation. Demo day pitches and presentations typically have included explicit declarations from companies about how much they are raising. These fundraises are typically done pursuant to the SEC's Regulation D, which now permits general solicitations for offerings. However, there are separate requirements around Reg. D offerings using general solicitation. So it would benefit companies raising money coming out of demo day to know whether or not they are generally soliciting investors for their fundraise.
The ERA demo day took some measures that acknowledged the elephant in the room.  Apparently, none of the presenting companies concluded their presentation with an explicit note of their fundraising intentions.  In fact, an MD of the ERA program noted
"None of the companies here are fundraising....  This is not a general solicitation."
We're interested to see how the Blueprint Health demo day (which is today, September 26) handles the issue.  If you attend, drop us a line in the comments section below.

In addition to monitoring evolving demo day practices, the SEC may have something to say as well, which will no doubt influence market practices around demo day.  Proposed amendments to Rule 506 of Reg. D have generated considerable controversy in the startup world.  Comment letters have asked the SEC to clarify general solicitation, including addressing demo days specifically (ideally creating some kind of explicit safe harbor around demo day practices).

As the regulatory landscape around fundraising continues to shift, it behooves founders and investors alike to monitor these changes and see where market practices settle out.
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