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SEC Proposes Exemption from General Solicitation for “Demo Days”

The SEC has proposed that entrepreneurs may talk more openly about investing in their companies at demo days.  Demo days provide start-ups with valuable opportunities to present their businesses to potential investors.  Under the proposed rule, subject to some restrictions, companies would be permitted to discuss an offering of securities at these events. 

This proposed rule is part of a larger proposal announced by the SEC on March 4, 2020 and is not yet final.  This proposal will remain open for comments for 60 days following publication in the Federal Register.

Currently, and prior to this proposed amendment, a company’s disclosure about a securities offering at a demo day may be considered by the SEC to be a general solicitation. A list of examples of general solicitation is provided in Rule 502(c), including any advertisement published in any newspaper or magazine or broadcast over television or radio, as well as any seminar or meeting where attendees have been invited by any general solicitation or general advertising.  The list provided by 502(c) is non-exhaustive; the SEC has determined that other publicly available media such as unrestricted websites also fall within the scope of general solicitation and general advertising.  Once a company engages in the general solicitation of an offering of its securities, the company must either wait before it may raise funds through a private placement, or limit the offering to comply with Rule 506(c).  Rule 506(c) permits the use of general solicitation, however, issuing companies are hesitant to raise funds through a 506(c) offering due to the cumbersome requirement to make a reasonable inquiry into the finances of each potential investor to verify that the investor does qualify as an Accredited Investor.  On the other hand, Rule 506(b) enables companies to raise funds from Accredited Investors and, additionally, up to 35 Sophisticated Investors.  The same level of inquiry into the finances of potential investors as required by 506(c) is not required in a 506(b) offering, which makes 506(b) preferable to many companies.  The proposed rule would exempt demo days and similar events from the limitations against general solicitation, enabling companies to fundraise under Rule 506(b) after public disclosure at a demo day.  The effect of this amendment would be to allow small and emerging issuers more efficient access to capital.

To rely on this proposed rule, an issuing company must comply with the limitations imposed by the SEC as to (i) the types of organizations that may sponsor events under this rule, (ii) the scope of the sponsor’s permitted activities, and (iii) the information that an issuer may provide at an event about a securities offering.

 

Organizations Who May Sponsor Demo Day Events

Communications at seminars or meetings sponsored by a college, university, local government, nonprofit organization, or angel investor group, incubator, or accelerator would be exempted by the proposed rule. 

 

Scope of Sponsor’s Permitted Activities

At the seminar or meeting, the sponsor would not be permitted to either engage in any investment negotiations between the issuer and attendees of the event or to provide any investment recommendations or advice.  The sponsor would also be limited to reasonable administrative fees, and may not receive any compensation for making introductions between the issuer and prospective investors, for investment negotiations between the parties, or those that would require the sponsor to register as a broker or dealer under the Exchange Act or an investment adviser under the Advisers Act.

 

Permitted Information about Securities Offerings

No specific offering of securities by the issuer may be referenced in advertisements for the event.  During the event, the proposed rule would limit the information regarding the offering of securities that issuers may provide to (i) notification of the offering or planned offering of securities by the issuer, (ii) the type and amount of securities being offered, and (iii) the issuer’s intended use of proceeds from the offering.

We will continue to monitor developments related to this proposal and will provide updates based on the SEC’s final adoption of a rule, if any.

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About this Author

Associate

Dan focuses his practice on corporate and securities law, working with public and private companies on a variety of matters.

While attending law school, Dan interned for the Honorable Gary R. Brown of the US District Court for the Eastern District of New York and the Honorable Mitchell H. Kaplan of the Massachusetts Superior Court, Business Litigation Session. Dan served as supervising editor and membership development chair of the Harvard Journal on Legislation, student attorney with the Harvard Prison Legal Assistance Project, and was...

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