New SEC Rules for Equity Funding
Meet Marianne Hudson, CEO of the Angel Capital Association. The Angel Capital Association is the leading professional and trade association supporting the success of angel investors in high-growth, early-stage ventures.
The SEC recently lifted their ban on general solicitation of funds for business, which permits startups and small business to raise capital by advertising their offerings. The rules governing these kinds of solicitations are found in Regulation D and are called “506(c)” offerings. The new rules create two kinds of Reg D 506 offerings:
Generally solicited 506(c) deals
- Entrepreneurs can advertise the offering any way they want, but the investor can only be an accredited investor
- Accredited investors must have net worth of $1 million (not counting their house) and/or annual income of $200,000
- Issuers must take “reasonable steps” to verify that investors are accredited
- Generally solicited offerings may not include unaccredited investors in an investment round
Nongenerally solicited 506b “quiet” deals
- Keep everything quiet with no advertising
- No changes to current practice; accredited investors self-certify and can have up to 35 unaccredited investors in a deal
Guidance available at www.angelcapitalassociation.org/aca-public-policy-jobs-act
What to watch out for
The current definition of general solicitation is very broad and appears to include demo days, venture forum events, business plan competitions, etc.
Additional rules have been proposed, including filing of a “Form D” in advance of general solicitations, providing solicitation materials in advance and adding “legends” to all solicitation materials. Issuing entrepreneurs have a one-time cure period of 30 days to file missing reports or materials, but lose their ability to raise a 506 offering for one year if they miss another filing deadline.
New rules for crowdfunding
Separately, the SEC has also proposed new rules for equity “crowdfunding” in which anyone, including unaccredited investors, may invest in entrepreneurial startups. This kind of funding is very different than general solicitation and has a different set of rules and requirements for both entrepreneurs and investors. This rule allows companies to raise up to $1 million in equity each year, using special investment portals or broker-dealers. No general solicitation is allowed in crowdfunding.