Recently (July 2013) the SEC finally eliminated the rules against general advertising and solicitation in the offering of private stock. Imagine seeing your company’s stock advertised for sale on Facebook, Twitter and Linkedin. This is a landmark change in how small businesses raise capital. But don’t rush out into the brave new world of fundraising without checking your facts. Here’s what you need to know.
Since 1933 the SEC has forbidden any form of Advertising to the public when offering private securities. Without a way to get the word out, private business owners had to work their own network — meeting angels, VC and private equity funds through introductions from friends and humbling cold calls. Now, the repeal of the ban on Advertising means that private business owners can attract these same people without one-on-one interaction.
The Good News
Business owners (issuers) can now Advertise in any media. Yes, Facebook and LinkedIn are fair game. That doesn’t mean that all of your high school friends can now send you their inheritance. In short, it means that you can ask them, and they can say they want to invest … but before you can accept their money, they would have to prove that they are an “Accredited Investor” (as defined in Rule 501 of Regulation D, from the Securities Act of 1933).
As with any securities offering, be careful not to get carried away with your description of the investment opportunity. Don’t mix up advertising with marketing… don’t make wild projections, promise any kind of return, or lie about your company. The SEC is letting you spread the word — but you must still choose your words carefully. And in any case, be prepared to have the SEC ask a bunch of questions as we all get used to this new way of doing business.
The Extra Work
When the SEC tears down one rule, they tend to build 3 more in it’s place, and this is no exception. Expect to work harder to complete a funding round using advertising. Most of the extra effort will go into verifying that each of your investors meets the definition of Accredited Investor. In the past, that meant simply asking investors to “self-verify” by filling out a short questionnaire. Some companies even opted to require nothing but that the investor check a box on a disclosure form. Sadly, the SEC will no longer allow this level of self-disclosure or self-validation by the investor. Now the burden falls squarely to the issuer.
There are at least 2 main ways the SEC says you can do this:
- Review information about the investor, including tax returns and/or other financial statements
- Get written confirmation from the investor’s lawyer or CPA that attests to the investor’s accredited status.
The purpose of these extra steps is to assure that you — the issuer — can “objectively” verify that the investor is in fact accredited, and likewise show that reasonable steps were followed to reach this conclusion. Keep in mind that verifying Accredited Investor status is only needed for the people who invest — not those exposed to the ad. As an Issuer, you can advertise to the masses, but only Accredited Investors can purchase your stock. There is no safe harbor or magic bullet. If you take short-cuts, the SEC is likely to hold you accountable.
By the way, if you’re familiar with the “old” way of filing a Regulation D securities offering, you’ll see one other change: Form D must now be filed prior to advertising and not at the end of the round, as was the case. And if you prefer the “old” way, take heart… you can still ignore 506(c) completely and carry on as before. Advertising is just one option, there are no new obligations if you decide not to advertise.
Weigh the Risks
There are a lot of folks getting pretty excited right now. Advertising equity for sale seems like a dream come true. Please remember that the rule changes do not do anything to reduce the risk of issuing shares, taking investment, or dealing with investors. In fact, advertising might simply exaggerate the old risks and add a few new ones.