Angel Insights Blog

Yesterday ACA submitted a comment letter to the Securities and Exchange Commission on its proposed rules on "Amendment to Regulation D, Form D, and Rule 156". For background, these rules would require issuers that generally solicit their offerings to submit an advanced Form D 15-days before they advertise, provide all of their solicitation materials to the SEC by the day of use, include "legends" in all materials, and provided a one-time 30-day "cure" to submit filings. If misfilings were not cured, then the issuer would lose the right to raise funds under Regulation D for one year.

Many ACA members were very concerned about the impact this could have on startups - including putting early-stage companies out of business. ACA's letter, which you can download here, focuses on those concerns and also offers recommendations to reduce the burden on startups.

Thanks to so many ACA members who wrote the SEC directly about these proposed rules and also requesting clarification on the new rules on verification of accredited investor status for generally solicited offerings. More information is on ACA's Web site resource page on SEC rules.

Key Recommendations in ACA Letter

ACA believes it would be best if the proposed rules were not enacted. If, however, the Commission decides to go forward with these rules, we believe the following changes would greatly improve the rule both in terms of capital formation and investor protection:

• Remove harsh penalties for non-compliance. Not only is the penalty severe, but the rule deprives issuers of due process. There are too many chances that an offering intended for 506(b) becomes a generally solicited 506(c) without the choice or knowledge of the issuer. If an issuer is to be disqualified, they need an opportunity to appeal the penalty.

• Remove the requirement for submission of Advance Form Ds 15 days before general solicitation activities. It is not clear that any significant additional investor protection comes from this requirement.

• Allow for parts of Form D to remain confidential to the public. For instance, some startups prefer not to reveal the amounts raised in their offerings for competitive reasons. Compliance in filing Form Ds would increase from current practices if issuers were able to request that portions of their filings were not made public.

• Require legends or disclosures only when terms are included in materials and/or in the legal documents at the close of the offering.

• Form working groups from Commission advisory boards to monitor and study 506(c) materials, rather than requiring the submission of all materials. As suggested by CrowdCheck, these “advisory bodies and working groups in the small business and investor protection area … could report back to the Commission and Staff on a regular basis, with anonymized examples.”

• Clarify the meaning of “general solicitation,” and consider carving out certain types of communications that should not trigger application of Rule 506(c). As noted by the Milken Institute, “The definition of ‘general solicitation’ remains ambiguous, especially when applied to modern forms of communication, including social media and websites, and when applied to practices that have become commonplace, particularly in entrepreneurial circles, such as pitch contests, accelerator competitions, and demo days.” The Institute further noted, “The Commission should provide clear examples of what it deems to be a general solicitation, and consider adopting for private markets the same advertising safe harbors that apply to companies pursuing a public offering. The Commission should also consider the types of solicitation that invoke the greatest concern over investor protection, and consider carve-outs where those concerns are not implicated.”