SEC Passes New Rules on General Solicitation: Mixed Blessing
July 27, 2013

According to Brian Knight, Vice President for Platform Services at CrowdCheck Inc., “The SEC just passed a rule allowing companies to “generally solicit” investors for certain deals, provided they only sell to accredited investors, take reasonable steps to ensure their investors are accredited, and limit their statements so that they are not misleading. This means that entrepreneurs will be able advertise publicly for investors although they have to be very careful about presenting an accurate and complete picture of their company.”

What does this mean for local investing in small companies which cannot afford the costs associated with extensive SEC registrations as part of their fundraising? As I read the Crowdcheck memo, the new SEC rule seems to make it more challenging to establish a “substantial pre-existing relationship” with an UNaccredited investor, known colloquially as “friends and family,” because the definition of “general solicitation” appears to have expanded and refined.

In addition, businesses that elect to solicit generally will have to obtain and maintain extensive documentary proof that an investor is indeed “accredited.” In the past, the representation of the investor was usually deemed sufficient. Hence, under the new rule, the small company (or its intermediaries) is now forced to protect itself from the investor’s Right of Rescission and SEC scrutiny by acting as an investigator for the SEC about the bona fides of the investor’s claims to be “accredited.” This additional documentation requirement obviously increases the transaction time and costs for small business.

Hence, rather than opening up the possibility of greater “crowd” participation in local investing, as intended under the JOBS Act, this new SEC rule seems to simply reiterate the availability of private investment for accredited investors only. Basically, the SEC is saying: “It’s OK to advertise your investment deal publicly as long as you are honest, register with the SEC and then sell interests only to accredited investors, vetted carefully.”

The SEC also passed a rule excluding certain “bad actors” – including people who have committed certain felonies or been placed under certain administrative sanctions – from participating in Regulation D. deals. Finally the SEC proposed a new rule expanding disclosure requirements for companies that want to participate in certain Regulation D. deals. This memo contains analysis by the CrowdCheck team about what the SEC did and what it might mean for companies seeking investment. CrowdCheck Memo on Adoption New Regulation D Final.