Fundraising is a large undertaking. When founders and CEOs are fundraising, it seems that 70 percent of their time is spent scouring the landscape for a few suitable investors or investment groups, scheduling meetings, pitching their past performance and future vision, and performing a number of due diligence tasks. This is not a job to take lightly. Obviously, every company needs funds to run and a large number of companies, particularly early-stage ventures, turn to investors to gain those funds.
On September 23, 2013, the capital raising process was made a bit easier when the U.S. Securities and Exchange Commission (SEC) lifted the 80-year-old ban on general solicitation. In essence, this measure now allows companies to advertise their private securities offerings to the public, thus increasing the flow of capital in the private economy. This can ultimately lead to more jobs as well as economic growth.
Don’t get too caught up in the excitement because there are a number of things to think about when you’re fundraising using general solicitation. One of the most important considerations to keep in mind is stay within the bounds of the law. Knowing these do’s and don’ts of fundraising will allow you to allocate your time more efficiently and raise capital more easily.
1. Filing and reporting requirements
When you’re generally soliciting, you must file what is known as a Form D. This is a simple, but essential form that will give an overview of your fundraising activities to date and what you’re looking to do going forward. Basic information such as monies raised to date and monies looking to be raised through 506(c) offerings are required. Although this information is basic, you should know that all of this must be filed within 15 days after the first sale of securities. Specific information on the form must be filled 15 days before the first use of general solicitation.
2. Investor verification
The idea of verifying that your investors are accredited was unheard of until now. For those unfamiliar, an accredited investor in the U.S. is generally someone with an income above $200,000 annually or a net worth exceeding $1 million (excluding one’s primary residence). In the past, you simply took investors’ word for it. Under the new rules, companies (“issuers”) utilizing general solicitation have to take what the SEC calls “reasonable steps’ to determine if your investor is accredited.
There are two ways to take the minimum reasonable steps necessary to satisfy this requirement. These include looking at tax records of the investor or getting a letter from their CPA, broker, investment advisor or attorney stating that the investor is accredited. Don’t skate around this requirement or take it lightly. The proposed penalty for bringing on an unaccredited investor and not taking the reasonable steps to verify his or her accredited status includes losing your exemption, but also returning capital back to investors. This means that the round you just spent 70 percent of your time putting together can disappear. In most cases, your business would be finished – doomed without the necessary capital to expand, let alone sustain. My advice would be to find a platform or service provider that goes above and beyond the minimum reasonable steps called for. This will help your company build an argument in the event of an audit, if you take extra steps in verifying investors’ status.
3. Bad actor checks
Be aware of “bad actor” checks, but don’t let this scare you too much. In layman’s terms, a bad actor check is required to ensure that members of the issuer’s executive team are not felons or in trouble with the SEC (there are also other criteria to check against). There are a number of trustworthy third-party services that will cover all of these compliance aspects for you.
To sum up, I would advise all companies interested in raising capital using new funding channels available to peruse the SEC rules to get a better understanding of what you’re up against and to turn to trusted third parties and advisors, including a securities attorney.