September 23, 2013
I would like to suggest three changes to the proposed rules for general solicitation for accredited investors, and fourth, to direct you to some stuff that others have written.
1) As i understand it, the proposal is that companies would have to file a form with the SEC every time their materials change. Since companies often change their slide deck almost every night during fundraising, this seems silly. I propose instead that a company should be allowed to post its changing materials on its website, and notify the SEC of this, once. If the SEC wants to re-check the changing materials, they can do so through the website.
2) As i understand it, the proposal is that startups would have to file Form D before fundraising. Form D looks like something that a startup should not do without the assistance of a lawyer, which makes it too expensive for a small company started by e.g. a college dropout with no money to do before a funding round (as opposed to after). I have heard that the SEC does not intend to actually review these filings within 15 days, which makes it seem that the pre-submission requirement is not really necessary, and should be dropped. But if you really want startups to notify the SEC in advance, I suggest creating a simpler form for which no lawyer is needed: specifically, a one-page form consisting only of page 1 of Form D (I say only page 1 because page 2 of Form D includes section 6, which no one can fill out without paying a lawyer more than a small startup can afford).
3) As i understand it, the proposal might require disclosures with the general solicitation? Disclosures don't fit on Twitter. Why not require the disclosures only with the paperwork given to investors before they actually close the deal?
4) Also, please see Fred Wilson's post at http://www.avc.com/a_vc/2013/08/some-thoughts-on-the-secs-rulemaking-on-general-solicitation.html . Fred Wilson is a venture capitalist. Also, I support AngelList's comment, http://www.sec.gov/comments/s7-06-13/s70613-37.pdf
Below is an excerpt copied from Fred Wilson's blog. I did not write the following post but I support it. Fred Wilson does not intend to submit the post below as a formal comment and I am not submitting it on his behalf as his comment, but it is posted publicly on his blog and it is written more eloquently than I could have done so I thought I'd quote it.
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Aug 29, 2013
Some Thoughts On The SEC's Rulemaking On General Solicitation
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It is my opinion, and that of those who we do business with, including our securities lawyers, that these proposed rules effectively make General Solicitation a non-starter for startup companies. If the SEC's intention, with these proposed additional rules, is to neuter General Solicitation to the point that it is legal but nobody avails themselves of it, they will succeed.
Here are a few of the most problematic rules:
1) A 15 day filing period for Form D before the company initiates its fundraising process (and before the company even knows if it will be able to raise capital). Typically we file for Form D after the raise has been completed. To do so before the company intitiates a fundraise is not realistic and ignores how startups raise capital. If there was one rule that I would most like to see the SEC remove, this would be it.
2) The requirement to formally file all written materials provided to investors with the SEC is very burdensome when entrepreneurs update their slides and other fundraising material from meeting to meeting.
3) The penalty for violating any of these rules is a one year prohibition from being able to raise capital under Rule 506. Given that startups need to raise capital frequently and they need to avail themselves of this form of securities offerings, this effectively means that a startup that violates any of these rules is likely to be put out of business. This is way too harsh and means the risk/reward analysis around using General Solicitation is skewed too much toward risk. Which means nobody will use it.
USV is an interested party to this rulemaking process in a number of ways. First, we invest in startups. The more startups there are, the better for us. So anything that creates more financing for startups is good for us. And anything that makes it harder for startups to raise capital is bad for us. Further, we are investors in CircleUp, a fundraising platform for startups that would benefit greatly from opening up General Solicitation.
I have been investing in startups since the mid 80s. I have participated directly or indirectly in the financing of hundreds of startups, possibly more than a thousand when all of my activities are aggregated. If I am an expert in anything, I am an expert in the financing of startups. And in that capacity, I can tell you that the proposed additional rulemaking around General Solicitation is a non-starter in startup land. If these rules come down as drafted, we will keep doing things the way we have been doing them for years and possibly the single most important change from the JOBS Act will have been for naught. And that would be very dissapointing to me and many others in startup land.
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