An 80-year-old ban on mass advertising by private issuers ended Monday, but startup entrepreneurs and others are approaching general solicitation with caution.
In July, the US Securities and Exchange Commission (SEC) voted four to one in favor of lifting a ban on general solicitation for private offerings. The rule became effective 60 days after publication in the Federal Register.
As part of that vote, the SEC proposed rules that mandate private issuers using mass advertising to include certain legends and disclosures in their marketing material; a requirement to notify the SEC 15 days before publicly discussing raising money; and the threat of a one year ban on general solicitation for non-compliance. Private issuers that mass advertise do not have to comply with the proposals until the Commission approves final rules making them effective.
The SEC received over 300 comments in response to the proposals, most of them critical.
“The requirement to include disclosures every time you mention a financing doesn’t work for most places those appear (try tweeting boilerplate legal text in 140 characters, or requiring reporters to include it in stories),” said in a consultation submission Naval Ravikant, the founder and chief executive of AngelList, a website that helps startups connect with angel investors.
Private equity firms using general solicitation face similar compliance risks. Only GPs that explicitly state on their Form D that they plan to publicly market their funds can rely on an exemption from registration requirements under the Securities Act. Without it, fund managers are still prevented from openly discussing fundraising efforts with the press or during public appearances.
Not all consultation submissions were critical of the proposals. South Dakota senator Tim Johnson, who chairs the Senate Banking Committee, said including disclosures in public marketing materials would “alert investors to investment risks and other information and distinguish those materials from materials used in non-private offerings.”
Issuers that use general solicitation now that the ban has been lifted should be aware of the potential for increased regulatory scrutiny. SEC staff will be “closely monitoring and collecting data on this new market to see how it in fact operates”, said Mary Jo White during a recent advisory panel, according to a Reuters report.
It is not yet clear to what extent private equity firms will make use of mass marketing. In a recent comment letter, PE Manager explored the various compliance considerations that have accompanied the reforms.