As we all climb out of our pandemic winter in Minnesota, we see a new slate of virtual (and soon again, live) events to introduce start-up companies to prospective investors. Some, like those investor events sponsored by Gopher Angels, Twin Cities Angels and AngelPolleNation, are open only to invited members and guests. Others organizations are known for broadly inviting large groups of interested entrepreneurs and investors for networking, such as BetaMN, gener8tor and MNCup.
Does this Constitute Public Solicitation of Investors?
A common feature of each of these events are the start-up pitches from start-up companies seeking equity capital to grow their businesses. A historical challenge for entrepreneurs participating in pitch sessions is worrying about whether presenting to a group constitutes public solicitation of investors under federal securities laws, which requires special compliance to avoid the pitch being treated as an unlawful unregistered public offering of securities.
New SEC Rule to Clarify this Issue
Fortunately, the SEC has enacted a new rule that took effect on March 15, 2021 to provide clarity for pitching companies and event organizers on how to avoid the public solicitation pitfall.
The new rule states that the entrepreneur is still considered to be making a private offering of securities if the pitch seminar or meeting has multiple companies presenting and is sponsored by an institution of higher education, a governmental or nonprofit organization or angel investor group, incubator or accelerator.
However, the event organizer can’t advertise any specific company’s securities offering for the meeting and is limited to charging only reasonable administrative fees for participating. If the event is virtual, the event organizer must only invite group members or individuals believed to be accredited investors or with industry or investment-related experience. The pitching company must limit its comments on the offering to the type and amount of securities being offered, the intended use of proceeds and the amount of the offering still available for purchase.
It’s fair now for entrepreneurs to ask event sponsors if they are conducting their upcoming sessions in conformity with the new rule. Sponsors should review their procedures to align with the safe harbor.
Of course, we at Avisen Legal are available to assist you in understanding your risks and opportunities in participating in the new crop of demo day and other investor presentation events.
Jeff Robbins, Avisen Legal partner and head of the firm’s entrepreneurial practice, is the founder of AngelPolleNation, a networking organization designed to create increased awareness, communication and education among accredited investors, informal investment clubs and more formal angel investment groups in Minnesota. In addition to a regular education topic of interest to early-stage investors, AngelPolleNation features three promising start-up companies at each meeting for investment consideration.