Emerging Markets Law

Are Public Solicitations Ill-Advised?

Posted In Crowdfunding

Funders Club recently wrote to the readers of its blog regarding the uncertainty posed by the SEC's recent lifting of the general ban on solicitations for Reg. D offerings. Funder's Club wrote that it was advising its members against utilizing public solicitations for Reg. D offerings until the rules became "more clear":

We’ve always made platform-wide decisions based on facts and circumstances that are known to benefit both investors and startups, not hype. This deliberate and facts-based approach is what leads to sustainable wins, which is our economic incentive as a VC.

Our stance on general solicitation is no different, which is why we’re opting to defer participation in general solicitation until it is a clear win for investors and startups. The reality is that as of today, top VCs, top incubators and accelerators, and the leading law firms advising investors and startups currently regard public fundraising as a question mark. Many are actively advising against it, and for example, are cautioning investors against companies who’ve participated in public fundraising to protect the investors.

While I agree that the SEC didn't do any favors to the investing community by simultaneously adopting one set of amendments to Reg. D that were immediately effective (i.e. Rule 506(c)) and proposing a second set of amendments that were merely proposed but not effective (i.e. the amendments to Form D and Rule 509), that doesn't mean that the entire approach is unworkable or too risky to navigate until further notice.

A conservative approach to public solicitations under the present system involves following the letter of Rule 506(c) while also observing the pending Form D rules as if they were effective. The SEC contemplated this (and even seemed to encourage this approach) in its release of the proposed Form D rules.

Yes, the Form D rules are awkward and not user-friendly. Regulations rarely are. Yes, the Form D rules ought to be fixed and there is much that could be fixed about Rule 506(c). But careful drafting and a conservative approach still leaves open the ability to use the existing rules until they are improved.

Funders Club's approach is more likely the product of its own position in the private fundraising eco-system. The SEC is closely watching online platforms like Funders Club.  Conservatism on the part of Funders Club, therefore, makes sense.

Start-ups and other issuers, however, that are not using online platforms may have a different view. They aren't in business to create deal flow.  They are in business to fund their business plans -- an approach that is feasible with the existing public solicitation rules.


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