General Solicitation One Year Later -- Where Are We Now?

By: Marianne Hudson, ACA Executive Director

This post originally appeared on

It's been one year since the Securities and Exchange Commission issued rules allowing entrepreneurs to publicly advertise private investment deals. So what’s the impact? Has lifting the ban on "general solicitation" significantly changed the landscape for startups and investors? What do investors need to know in this new world?

General solicitation is one of five initiatives in the JOBS Act passed by Congress in 2012 to help startups access more capital, in order to grow and create more jobs. Although the JOBS Act is best known for promising to bring us equity crowdfunding by unaccredited investors, the new general solicitation rules are having the biggest impact on angel investors and entrepreneurs.  (We’re also still waiting for final crowdfunding rules.)

Fewer startups are using general solicitation than originally predicted. Instead, many are continuing to seek investments privately as in the past. That's because the rules come with a catch, a requirement that startups that solicit investment publicly take “reasonable steps to verify” that all their purchasers are accredited investors. Before this rule came out, the startup ecosystem had settled into a comfortable practice where accredited investors signed a self-certification form for any private investment. But now, in an advertised deal, startups must do more to document the accredited status of their investors. And, unfortunately, most startups and most investors are assuming that this has to be done by using “safe harbors” in the new rules, which include requirements such as providing tax returns, W-2s, brokerage statements, etc. for review by the issuing entrepreneurs or a third party such as an attorney, accountant or broker-dealer.

The problem is that angel investors aren’t interested in sharing their personal balance sheets in this way. Beyond the personal privacy issues, it's time consuming, costs money, and has to be repeated too often under the safe harbors (third party verifications are good only for one calendar quarter). Many attorneys advise investors not to invest in generally solicited offerings because entrepreneurs who fail to properly verify that investors are accredited could face severe penalties, which increases the angels’ risk in an already risky asset class.

Sadly, many people seem to have overlooked that the new rules actually prefer that issuers use a “Principles-Based Methodology” (PBM), which tells startups to look at the facts and circumstances of the offering and related players, and potentially does not impose the categorical burdens and costs of the safe harbors.

To help educate startups and investors about the PBM as a viable option when general solicitation is used, the Angel Capital Association, working with angel investors and attorneys around the country, developed an application of PBM that is appropriate to consider when the purchasers are members of angel groups. It involves two things: 1) defining specific criteria for angels who are members of an “Established Angel Group (EAG),” and 2) establishing a certification process for angel groups to become recognized as an “EAG”.

This approach falls within the Principles-Based Methodology supported by Keith Higgins, director of the SEC’s Division of Corporation Finance, in a speech at the ACA Summit in March 2014. It gives issuers working with angel investors who are part of an EAG a way to satisfy the verification burden by focusing on the investor’s membership in an organization, rather than personal financial information.

"The SEC’s Keith Higgins wanted the PBM to be valid and alive and a real way to approach verification," says William Carleton, an attorney who chairs ACA's public advisory council. "He mentioned the EAG as an example of PBM. Providing this process helps entrepreneurs because it says `when you deal with someone who is a member of an Established Angel Group, you know many things about that person that are pertinent - the group has a code of ethics, represents that members are accredited based on long relationships, and was formed for long term investing, not as a one shot deal in the heat of the pressure of a particular opportunity.'" 

So Where Does This Leave Angels and Entrepreneurs?

Although some lawyers, including Carleton, have signed off on PBMs such as EAG and advise startup clients to apply such methods to satisfy the verification burden of the new rules, others find the Principles Based Methodology vague and continue to advise entrepreneurs only to use the safe harbors to avoid possible penalties down the road.  Carleton encourages more people to consider any type of Principles-Based Methodology, noting that the PBM was developed before the SEC issued the final rules with the “safe harbor” provisions.

Meanwhile, many entrepreneurs are wary of the whole general solicitation process. Taking a conservative approach, many continue to only offer private placements that don't require the financial verification process. Sadly this defeats the purpose of general solicitation because it restricts how many investors an entrepreneur meets.

This is apparent with online accredited platforms such as AngelList and CircleUp, which offer both generally solicited and private deals. Both platforms said in July that less than 20 percent of their deals were advertised. Issuers are selecting not to advertise in large part because of regulatory concerns, mostly having to do with verification, although Carleton also points out attorneys are also concerned about proposed SEC rules that would require considerable reporting by startups that carry heavy penalties for noncompliance.

Another complication hindering the widespread use of general solicitation is that the current definition of “general solicitation” appears to include "demo days". These are university business plan competitions and venture forums by economic development agencies accelerators that have been going on for 20 years without issue. This is troublesome because demo days offer a great forum for angels and entrepreneurs to connect. To address this issue angels are working with U.S. Sen. Chris Murphy (D-Conn.) and a bi-partisan group of Congressmen on the HALOS Act, which would remove demo days from being considered general solicitation.

I believe that the rules will become increasingly clear as the market adapts and that more deals will be done through general solicitation.  In the meantime though, it is important for angel investors to make their own decisions on whether or not they will invest in generally solicited offerings – and to get advice from their own attorneys on what to do.  There are more questions to ask of entrepreneurs about how they are navigating the new world of general solicitation and more reasons for all parties to protect themselves with good legal advice.