New SEC laws permit companies raising funds to make general solicitations (public offerings) for the sale of securities under SEC Rule 506(c), but not without strings attached. Companies making general solicitations will only be able to sell to accredited investors and must take reasonable steps to verify accredited investor status

1. Raising Capital Under the New General
Solicitation Rules
September 2013
Bo Sartain, CEO
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2. • General Solicitation prohibited unless issuer is
“going public”
• Securities Act Section 4(2) exempts sale of
securities sold “not in a public offering”
• Rule 506 of Regulation D, a “safe harbor”
under Section 4(2)
– Unlimited number of “accredited investors”
– Unlimited dollars that can be raised
– Up to 35 non-accredited investors, but watch out, if you have non-accredited investors
there are information disclosure requirements under Rule 502 (PPM) and the non-
accredited investors must meet “sophistication” requirements
Historical Overview
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3. “Quiet” 506 Transactions
– Old Securities Act Section 4(2) is now 4(a)(2)
– Old Rule 506 is now Rule 506(b)
– No “general solicitation”
– But, for 506(b) transactions, it is likely that the Form D will be required in the
future (it has been optional) (this is a proposed rule)
The old rules are still in place (technically)
Two Ways to Raise Capital
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4. “Noisy” 506 Transactions
– New Section 506(c)
– General solicitation is allowed
– All purchasers must be accredited investors. No exceptions
– Issuer must take “reasonable steps” to verify that all investors are accredited
investors
• Self-certification (a questionnaire or representations and warranties) is
not enough
Effective Date: September 23, 2013
Two Ways to Raise Capital
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5. • Obvious General Solicitations
 A website accessible to the general public
 Widely disseminated email or social media
 Print media, such as a newspaper
 Television, Radio
• Not Obvious, but they are General
Solicitations
 A solicitation at a seminar where attendees have been invited by general
solicitation or general advertising, such as an unrestricted website
DANGER: Pitch Day/Demo Day Competitions (Rice Alliance, Tech
Wildcatters, Texas Venture Labs) are general solicitations
What is a General Solicitation?
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6. • Solicitation of Angels and Angel Groups on
Gust, AngelList, EquityNet, etc. ???
“An issuer that solicits new investors through a website accessible to the general
public, through a widely disseminated email or social media solicitation, or through
print media, such as a newspaper, will likely be obligated to take greater measures to
verify accredited investor status than an issuer that solicits new investors from a
database of pre-screened accredited investors created and maintained by a
reasonably reliable third party.”
DANGER: Did the SEC just say that submitting offering materials
through Gust or AngelList is a general solicitation?
What is a General Solicitation?
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7. • Any General Solicitation makes the whole
offering subject to the 506(c) rules
– A perfectly good 4(a)(2) or 506(b) offering becomes a 506(c) offering if any
general solicitation is made.
• Integration under Rule 502(a)
– 6-month look forward and backward
– A perfectly good 4(a)(2) or 506(b) offering becomes tainted by a subsequent
506(c) offering if the two are integrated.
DANGER: What you do later may invalidate what you have done
before
What is a General Solicitation?
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8. • Facts and circumstances test/“principles-
based approach”
• Factors to consider
– The nature of the purchaser and the type of accredited investor
– The amount and type of information the issuer has about the purchaser
– The nature of the offering, such as the manner in which the purchaser was
solicited
• Examples
– High minimum investment makes it more likely they are accredited
– Solicitation to the public at large versus a database of pre-screened accredited
investors requires more verification steps
What are “Reasonable Steps”
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9. • Non-Exclusive Safe Harbor for Individuals
– Invalidated if issuer has knowledge that an investor is not an accredited
investor
– Income Test
• Investor has earned at least $200K (or $300K together with spouse) in
each of the last 2 years and is expected to earn at least that much in the
current year
• Review of IRS forms that report revenue (W-2, Form 1099, Schedule K-1 or
filed Form 1040)
• Written representation from such person that he or she has a reasonable
expectation of reaching the income level in the current year.
DANGER: There may be no way to rely on this safe harbor in the
first quarter of any year before W-2s, 1099s, K-1s or 1040s are
prepared.
What are “Reasonable Steps”
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10. • Non-Exclusive Safe Harbor for Individuals
– Net Worth Test
• Investor has a net worth of $1,000,000 excluding primary residence
• A written representation that all liabilities necessary to make a net worth
determination have been disclosed
• Assets: review of bank statements, brokerage statements, other
statements of securities holdings, certificates of deposit, tax assessments
and appraisal reports issued by independent third parties
• Liabilities: review of consumer report from at least one of the nationwide
consumer reporting agencies
• Data may not be more than 3 months old
What are “Reasonable Steps”
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11. • Non-Exclusive Safe Harbor for Individuals
– Reliance on Third Parties
• Registered broker-dealer, SEC-registered investment advisor, a licensed
attorney or a CPA
• Written confirmation that such person has taken reasonable steps within
the last 3 months to verify that the purchaser is an accredited investor.
– Grandfather provision for existing investors
• Issuers do not have to take reasonable steps to verify accreditation for
existing investors who self-certified before in 506 transactions
What are “Reasonable Steps”
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12. 1. The issuer closes a new round with investors
that the issuer contacted directly and with
whom the issuer has a prior relationship.
2. Same facts as 1, but then the issuer then wishes
to finish out the round and does a quick pitch at
the Rice Alliance.
3. Same facts as 1. 5 months later, the issuer
launches a new round by making an
announcement on its website.
DANGER: It may be virtually impossible for startups to avoid
general solicitation.
Examples
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13. • Disqualifies the transaction from Rule 506(b)
and 506(c)
• New Rule 506(d)
• Disqualification occurs if:
– issuer, any predecessor of the issuer, any affiliated issuer, any director,
executive officer, other officer participating in the offering, general partner or
managing member of the issuer, any beneficial owner of 20% or more of the
issuer’s outstanding voting equity securities, or any promoter or placement
agent (or their managers, officers and directors)
– has been convicted of a felony or misdemeanor involving securities, is subject
to any order or injunction involving securities, is barred from engaging in the
business of securities, banking or insurance, has had a securities license
revoked
Basically, disqualification occurs if anyone connected with the
transaction or issuer has a history with a securities criminal
conviction or disciplinary action
“Bad Actor” Provisions under Dodd-Frank Act
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14. • Stay tuned, new proposed rules may:
– require filing an “Advance Form D” 15 days before any general solicitation is made
for 506(c) transactions
– require filing a Form D within 15 days after the first sale of securities in the 506(b)
or 506(c) offering (This is already the rule)
– require filing a Form D within 30 days after the offering is completed or cancelled
(for 506(b) and 506(c))
– require filing an updated Form D at least annually if the offering is ongoing
– allow a 30 day cure period for 1 late form D filing in any offering
– require specific legends and other disclosures to be added to all offering
documents
– require filing all offering documents used in a general solicitation with the SEC no
later than the first day a general solicitation is made
– increase the information required to be filed in Form D
DANGER: failure to comply will automatically disqualify an issuer from
using Rule 506(b) and 506(c) for 1 year following the cure of any failure
to file a Form D or a breach of these new rules
Proposed Regulation D Rules
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15. • Assume that your offering will contain a
general solicitation
• Assume that offerings will be integrated
together
• “Best Practice” may be to file Advance Form D
immediately if/when proposed rules become
effective
• Ensure company profiles on Angellist, Gust,
etc. do not indicate your company is raising
capital (why take that chance?)
Takeaways
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16. Contact:
Bo Sartain
214.403.8039
bo@venturedocs.com
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