Monday, October 7, 2013

General (Solicitation) Confusion!

General (Solicitation) Confusion!

There is, and I think will continue to be for some time, enormous confusion about the JOBS Act General Solicitation rules. I have had multiple lengthy discussions about it recently with entrepreneurs and others. Some but not all venues where startups showcase themselves are changing the way they operate. And everyone seems to be getting pretty anxious. I am not a lawyer but I, and I know many many other investors, still get asked by early stage entrepreneurs: "So, what am I to do!?"

In my view each and every entrepreneur needs to talk to their own company lawyer about this and get comfortable with what they can and can not do/say while fund raising. Armed with advice specific to them, they can assess what they need to do depending on whether they go down the General Solicitation (rule 506c) vs non General Solicitation (rule 506b) routes. And to make matters worse although General Solicitation is now legal (since 9/23) there are multiple rules pending finalization that could make General Solicitation much more onerous. So it's a moving target.

In the past two weeks I have been to Demo Day/pitch events with multiple formats where each has taken a different approach. This highlights the fact that entrepreneurs can't assume they can look to third parties for concrete "... the right way to do it is ..." guidance.

1. At one event the presenting companies had no financing related slides or discussion in their decks. So presented their businesses pure and simple.

2. At another event the hosts had suggested that financing info be removed from pitch decks ... some entrepreneurs did that in their materials, some didn't.

3. And at another event all the entrepreneurs pitched with what might call the "traditional" manner. So a full investor deck ... with a slide on their financing. 

For those organizing these types of events Trent Dykes sets out the options in a very comprehensive manner.

The SEC has never explicitly defined what amounts to general solicitation - which is not helpful. Rather they rely on a facts and circumstances test. As they did in the case of Angel list syndicates they will respond to specific clear asks for a No Action letter. But their decisions on any individual situation seem likely to stay dependent on the specific facts and circumstances. Still, based on guidelines and precedent, attorneys have some sense of the "rules" but there are many grey areas that are open to interpretation and more or less conservative legal opinions can be found. 

Entrepreneurs should, in my view, not just ask: "What am I to do?" but also "And what are the risks?". Knowing the risks attached to various options, when bright lines are lacking, allows a business judgement to be made. (As a colleague once pointed out to me: "You always want a lawyer on the bus. But you never want a lawyer driving the bus.")

There are some basics you can work with: I recently came across this simple two side cheat sheet, prepared by seedinvest with input from Cooley. It seems a pretty helpful guide to have on hand. Including, at the risk of belaboring the point, to have on hand when you talk to your own lawyer. 500 Start Ups have also provided a good take thanks to Greg Raiten, their General Counsel. For a longer audio and visual run through The ACA (Angel Capital Association) and Global Accelerator Network (GAN) have posted a 1h5 15mn webinar giving many detailed insights and recommendations. (There is a good section starting at minute 50 where Peggy Wallace from Golden Seeds addresses the questions entrepreneurs should ask their attorney.)

There seems to be one way out of the confusion. Namely to default to using general solicitation working on the basis that since you don't know for sure when you are going to cross a grey line you might as well go straight to the other side. VentureDocs pointed out that arguably many things entrepreneurs have done to date amount to general solicitation. Including for example: a) using third party platforms even if they are open only to accredited investors or b) presenting at any event that is announced on a public website. They conclude:

"It may be virtually impossible for startups to avoid general solicitation when selling preferred stock, convertible notes or common stock. Many activities that companies are already doing constitute general solicitation."

Where this all ends up seems likely to hinge on whether the SEC interprets general solicitation closely in accordance with past guidance and practice ... or not. We shall see.

Whether you like all this or not (I am guessing not!) as an entrepreneur in my view you do need to get informed. As a friend thoughtfully noted to me: "Entrepreneurs aren't expected to know everything, but they are expected to be able to figure it out." The point being that as an entrepreneur you will appear smarter and more on the case to investors if you are on top of the key issues and clearly have experts on speed dial (yes, that would be your attorney again) for more detail as and when needed.

Final thought: For a close to real time take on all this I find Joe Wallin's blog very helpful. He comments regularly, and thoughtfully, on this General Solicitation mess (and other legal matters that impact startups too!)