As we have reported earlier, the SEC has come up with a revised rule for general solicitation. It used to be that internet startups and technology startups in general were quite restricted as to how they can get the word out regarding the investment opportunities in their company. Now with the relaxation of the general solicitation rule on paper, companies can reach a wider range of people. The truth is the excitement about this rule change focuses on the enlarged market but the reality is it doesn’t really enlarge the market but only enlarges the modes of communication for conveying or communicating the investment opportunity¬—big difference.
Startup companies are still only legally allowed to solicit “sophisticated” investors. There’s a legal definition of sophisticated investor. This is not everybody with a few bucks in their pockets and this is what every small startup needs to wrap their minds around. There seems to be this gold rush or bonanza mentality among many startups that just because the SEC has lifted the lid on the ways you can use general solicitation, that this automatically opens up the market to a huge amount of money. Nothing could be further from the truth. You are still restricted from the same pool of people but you can use more channels of communication to reach those people— that’s what changed.
It’s really important that companies do their due diligence in actively figuring out if the people they are soliciting are actually qualified to invest under the SEC rules. If you screw this up, you will be banned from raising money for a whole year. While some people might roll their eyes or scoff at the penalty of a one year solicitation ban, this is the technology industry we’re talking about after all. One year in the tech world is like twenty years in the real world. You don’t want to be sidelined for one year so play by the rules. There are a lot of new companies that have grown up to service startup companies in terms of verifying the status of would-be investors. It’s a good idea to do business with these specialists to ensure that the people you are soliciting are actually legit. In other words, you are legally allowed to reach these people.