It’s an exciting time to launch a start-up. And recent improvements to securities laws make this more true than ever.
Under the Exchange Act, entrepreneurs and start-ups wishing to raise capital must either take their company public and file a registration statement with the SEC, or qualify for a “private offering exemption”.
Again this year, the SEC has significantly increased the amount of capital companies can raise through crowdfunding and other types of private offerings. For business executives and entrepreneurs, the exemption you decide to use will largely depend on the amount of capital you intend to raise:
$5 million: The Reg CF have, for example, increase Crowdfunding limits from $1.07 million to $5 million. Public relations and marketing settings are governed by Rule 204.
$10 million: Rule 504 now allow for the sale of up to $10 million in any given year.
$20 to $75 million: Bi-level Reg A offerings now raise up to $20 million and $75 million respectively.
Unlimited Capital: Rule 506(b) allows companies raise unlimited capital from an unlimited number of accredited and up to 35 non-accredited investors. But it requires stronger disclosures and prohibits public relations and marketing efforts that are considered “general solicitations.” But, under Rule 506(c), companies are allowed to use public relations, marketing, social media, and advertising to acquire “accredited investors.”
A field of private equity PR opportunities and, well, mining.
As you can see, these “exempt offers” each come with their own set of restrictions. This presents a minefield for the uninformed entrepreneur embarking on a crowdfunding campaign or a so-called “friends and family” tour.
Demo Day: Test the Waters (Carefully) Before Selecting Your Private Placement Waiver
From the outset, the legal exemption you select will set the parameters for your marketing, public relations and advertising campaigns in terms of substance, audience and timing. So now, more than ever, PR and Legal need to work together from the start of any fundraising plan.
Under the new rules, startups have been given more leeway to “test the waters” through early communications with potential investors. This saves issuers the time and money associated with changing direction only after costly private placement documents have already been created.
Rule 148 governs the public relations and communications with investors surrounding such a “Demo Day” event. The key here is to design your communications to accurately generate and gauge investor interest without being viewed as a “general solicitation” or advertisement.
Potential wrecks at the intersection of public and legal relations
Here are some potholes to watch out for when developing your private offer PR plan. Common errors include:
Bad public relations materials: Issue public relations and marketing materials that grossly deviate from the private placement memorandum filed with the SEC.
Pro Tip: Involve your PR people early in the process. Your public relations agency and law firm should work together from the start to prepare your private placement memorandum (PPM). A well-written PPM should be a great marketing and sales tool, as well as a legal document.
Botching a Demo Day event: Promoting an event that puts potential investors in front of offer presenters carries the risk that the SEC will interpret it as the actions of an unregistered investment adviser or broker-dealer.
Pro Tip: Your PR agency should be aware that when promoting an event, avoid making specific reference to a presenter’s offer. Your attorneys will likely understand this if they are properly integrated into your PR and marketing team. Revising materials can result in a significant waste of time and capital.
Different public relations and marketing messages on different mediums: Your legal compliance – and marketing – documents should be confined to the four corners of the private placement memorandum filed with the SEC. Failure to unify them can lead to problems with the SEC.
Pro Tip: Your elevator pitch to reporters, company websites, press releases, investor emails and presenter communications are all sales tools. Use them. But make sure they don’t stray from your formal offering memorandum or from each other. That’s why, once you’ve tested the waters and chosen your safe harbor, you need to write your offer documents in a way that incorporates everything you want to communicate about your offer, along with the required information. This way, you avoid the risk of outside promotional content on your website, press releases or social media deviating from the private placement memorandum.
Broadly targeted outreach on social media: Investors acquired via social media, pursuant to Rule 506(c), must be accredited. Poorly executed social media campaigns could be used against you in a case alleging violations of Accredited Investor Requirements.
Pro Tip: Social media campaigns should be designed to target sophisticated investors. The SEC will consider the extent of the broadcast and the substance of the content to make its decision.
The SEC has significantly expanded opportunities for startups to raise capital through crowdfunding and other private offering exemptions. As in most regulated industries, the rules and limits of marketing, public relations and advertising are many. Learn them. And then use them to your advantage. Once you’ve mastered the lay of the land, you can launch bold, creative, and inspiring PR initiatives that think outside the box while coloring inside the lines. Your less informed competitors, navigating the minefield without a detailed map, will have a hard time keeping up.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.