What makes a sale of securities a “private” offering as opposed to a “public” offering? The primary distinction is that firms who make public offerings seeking equity investors must register with the Securities and Exchange Commission (SEC). On the other hand, private securities offerings are defined as those that do not need to formally register with the SEC and face the significant and burdensome regulations that come with a “public” designation. ((See Chris Brummer & Daniel Gorfine, The JOBS Act Isn’t All ‘Crowdfunding’, Forbes (Oct. 8, 2013, 8:00 AM), http://www.forbes.com/sites/realspin/2013/10/08/the-jobs-act-isnt-all-crowdfunding.)) This exception to the registration requirement for private offerings is further expanded upon in the SEC’s Regulation D, Rule 506. ((Id.)) Rule 506 said that these exempt offerings could not be publicly advertised, nor could they be offered to anyone other than “accredited” investors. ((Id.)) However, the Jumpstart Our Business Startups Act (the “JOBS Act”), signed into law by President Obama in 2012, removed the limit on public advertisement from the Rule 506 exception ((See id.)) Specifically, Title II of the JOBS Act allows firms who publicize their offers through general advertising or “general solicitation” to still be considered “private”, rather than public, for the purposes of the Rule 506 exception. ((Jumpstart Our Business Startups Act, Pub. L. No. 112-106, §201, 126 Stat. 306, 313-315 (2012).)) Title II, although passed in 2012, could not go into effect until the SEC created new guidelines for these less-restricted private offerings. On September 23rd of this year, the new SEC rules were finally triggered, officially removing the ban on general solicitation for private securities offerings. ((Rebecca Grant, The Ban Has Lifted: Here’s What These 6 Companies Think About General Solicitation, Venture Beat (Sept. 23, 2013, 7:00 AM), http://venturebeat.com/2013/09/23/the-ban-has-lifted-heres-what-these-6-companies-think-about-general-solicitation.))
Now that general solicitation is in effect, the line between public and private seems to have blurred. If so-called “private” offerings can be advertised on the free market, over social media, or anywhere else, it might no longer make sense to consider these exceptional offerings as truly “private.” ((See, e.g., Russ Garland, SEC Loosens Reg D Rules but PE and VC Firms Remain Cautious, Wall St. J. (Aug. 1, 213, 2:45 PM), http://blogs.wsj.com/privateequity/2013/08/01/sec-loosens-reg-d-rules-but-pe-and-vc-firms-remain-cautious (referring to these as “unregistered” securities rather than “private” securities.)) Beyond this line-blurring, the lifting of the general solicitation rule made immediate ripples in the financial marketplace. On the morning of September 23rd, TechStop, a Silicon Valley startup, issued a press release soliciting 60 million dollars from investors. ((Lora Kolodny, Startups, VCs Now Free to Advertise Their Fundraising Status, Wall St. J. (Sept. 23, 2013, 8:45 AM), http://blogs.wsj.com/venturecapital/2013/09/23/startups-vcs-now-free-to-advertise-their-fundraising-status.)) TechStop’s position is that the lifting of the ban has finally allowed the private securities market to catch up to the expectation of efficiency that comes with the internet age. ((See Grant, supra note 6), http://venturebeat.com/2013/09/23/the-ban-has-lifted-heres-what-these-6-companies-think-about-general-solicitation.)) Mark Hatch, a chief executive with TechStop said that when the ban was in place, his firm was forced to rely on resource consuming face-to-face meetings in order to develop the capital to expand his firm. ((Id.)) These in-person meetings can now be replaced with more efficient methods that involve less man power and reach much wider audiences, such as print advertisements, internet blog posts, Facebook and Twitter messages, and mass-emails. ((Kolodny, supra note 8.)) Even things as simple as conference presentations are now allowable for the first time since the SEC began its regulatory hegemony. ((Id.; Grant, supra note 6.)) In addition to making things easier on the seller’s ends, the lifting of the ban on general solicitation also allows private investors to more easily access information to help determine which securities purchases make the most sense for them. ((See Ryan Caldbeck, How General Soliciation Will Change Private Equity and Venture Capital Forever, Forbes (Sept. 23, 2013, 12:16 PM), http://www.forbes.com/sites/ryancaldbeck/2013/09/23/how-general-solicitation-will-change-private-equity-and-venture-capital-forever.))
Still, the removal of this ban does not come without any consequences for firms that choose to participate in general solicitation. The portion of Rule 506 that limited private securities sales to accredited investors is still in place. ((Brummer & Gorfine, supra note 1.)) The JOBS Act actually calls for this limit to be removed as well; however, the SEC has not drafted the necessary rules to allow for this section of the JOBS Act (Title III) to be enacted. ((Id.)) Therefore, the SEC now requires firms that generally solicit investors to check the accreditation of their investors themselves. ((Kolodny, supra note 8.)) Furthermore, the SEC has proposed additional rules which, if enacted, would require startups engaging in solicitation to make additional filings with the SEC or face regulatory penalties ((Brummer & Gorfine, supra note 1.))
Additionally, any optimism for a dawn of a new, pervasive investing market must be tempered by the fact that these private firms may only draw from accredited investors, whose net worth exceeds one million dollars or who have an annual income of 200,000 dollars or higher. ((Grant, supra note 6.)) According to the GAO, only 8.5 million Americans would qualify as accredited, meaning a large portion of the population would be shut out of the market. ((Id.)) Also, general solicitation will have little impact on the most experienced and powerful venture capital firms. Generally, these firms prefer to work with a small “pool” of reliable investors and might be resistant to changing from their ways. ((Garland, supra note 7.)) But, perhaps with the advent of general solicitation, this old guard of venture capital firms will lose its dominance over investment markets. Ryan Caldbeck, a contributor to Forbes, posits that in the pre-general solicitation market, the limited information flow allowed intermediaries like private equity and venture capital funds to thrive because they controlled the access to investment opportunity information. ((Ryan Caldbeck, How General Soliciation Will Change Private Equity and Venture Capital Forever, Forbes (Sept. 23, 2013, 12:16 PM), http://www.forbes.com/sites/ryancaldbeck/2013/09/23/how-general-solicitation-will-change-private-equity-and-venture-capital-forever.)) Now that startups can engage private investors directly, perhaps the days of large fund dominance are over. At the moment, it has only been three weeks since Title II came into effect. Any long term impacts remain to be seen.
Latest posts by Gregory Berman (see all)
- New Faces in Venture Capital - February 24, 2014
- The Impact of Media Portrayals on Private Equity and Venture Capital - November 8, 2013
- General Solicitation and the New Wave of Private Securities Offerings - October 11, 2013