On August 6, 2015, the SEC issued new Compliance and Disclosure Interpretations (CDIs) that clarify the conditions under which “pitch events,” such as demo days and venture fairs, would not be considered general solicitation.
Here’s how this clarification affects angel investors. Let’s say you and 40 other investors attend a demo days event where half a dozen entrepreneurs present information about their respective companies and ask you to invest in their securities under Regulation D, Rule 506(b). In other words, each issuer makes an explicit offer of securities to everyone in the audience using the Rule 506(b) exemption.
Before this event, you—and in fact most of the audience members—had not heard of these companies. And you did not personally know, nor were you invited to the event by, any of the founders or their intermediaries.
Until recently, both entrepreneurs and angel investors, and the Angel Capital Association in particular, worried that such pitch events as demo days or venture fairs (the latter are usually sponsored by universities) constituted general solicitation. Rule 506(b) prohibits general solicitation. So if an issuer makes an offer under Rule 506(b) and is found to engage in general solicitation, that company would be disqualified for the exemption.
(As a result of the Jumpstart Our Business Startups Act of 2012, the SEC split Rule 506 into two main parts. The “traditional” Rule 506(b) maintains the ban on general solicitation, while the “new” Rule 506(c) lifts that ban but requires investors to verify their accredited status.)
Thus some angel investors have been reluctant to attend demo days, or invest in companies that participate in demo days where those companies make Rule 506(b) offerings, due to the uncertainty about whether these events would violate the general solicitation ban.
The SEC’s new CDIs clarify that “demo days or venture fairs do not necessarily constitute a means of general solicitation,” according to Washington, DC, attorney Ted Yu . In a Corporate Finance Alert published by Yu and his colleagues at Skadden, Arps, Slate, Meagher & Flom, the authors wrote that “an issuer’s presentation at a demo day [or] venture fair “may not be considered a general solicitation if attendance is limited to:
- Persons with pre-existing substantive relationships with the issuers or the event organizer; or
- Persons who have been contacted by members of angel investor networks or similar informal, personal networks of experienced investors.”
Under the second condition, audience members need not have a pre-existing relationship with issuers (or their intermediaries) or event organizers. If you are a member of an “angel investor network” or “personal network of experienced investors,” and were invited to the event by other members, then you are “not blowing the issuers’ 506(b) exemption,” says Yu.
The August 13 alert, also highlights other SEC interpretations of general solicitation under Rule 506(b). See the full Skadden alert [pdf] here:
— David M. Freedman has worked as a financial and legal journalist since 1978. He writes a weekly column for Accredited Investor Markets. Freedman is a coauthor of Equity Crowdfunding for Investors (Wiley & Sons, June 2015).