It's an exciting time to launch a start-up. And recent securities law improvements make this truer than ever.
Under the Exchange Act, entrepreneurs and start-ups wishing to raise capital must either take their company public and file a registration statement with SEC or else qualify for a "private offering exemption."
Just this year, the SEC dramatically increased the amount of capital that companies can raise through crowdfunding and other types of private offerings. For corporate leaders and entrepreneurs, which exemption you decide to use will depend largely on how much capital you intend to raise:
$5 Million: Reg CF has, for example, increased crowdfunding limits from $1.07 million to $5 million. PR and marketing parameters are governed by rule 204.
$10 Million: Rule 504 now allows for the sale of up to $10 million in a given year.
$20 to $75 Million: Reg A's two-tiered offerings now make it possible to raise as much as $20 million and $75 million respectively.
Limitless Capital: Rule 506(b) lets companies raise limitless capital from an unlimited number of accredited investors and up to 35 unaccredited. But it requires more robust disclosures and bans PR and marketing efforts considered "general solicitations." But, under Rule 506(c), businesses are permitted to employ public relations, marketing, social media and advertising to acquire "accredited investors."
A Private Equity PR Minefield of Opportunity and, Well, Mines.
As you can see, these "exempt offerings" each come with their own set of restrictions. This presents a minefield for the uninformed entrepreneur embarking on a crowdfunding campaign or so-called "friends and family" round.
Demo Day: Test the Waters (Carefully) Before Selecting Your Private Offering Exemption
From the outset, the legal exemption you select will set the parameters for your marketing, PR and advertising campaigns in substance, audience and timing. So now, more than ever, PR and Legal must integrate their efforts at the inception of any capital-raising plan.
Under the new rules, startups have been afforded more latitude in "testing the waters" through early potential investor communications. This allows issuers to save time and money associated with changing direction only after costly private placement materials have already been created.
Rule 148 governs public relations and investor communications surrounding such a "Demo Day" event. The key here is to craft your communications to accurately generate and gauge investor interest without being deemed a "general solicitation" or advertisement.
Potential for Wrecks at the Intersection of PR & Legal
Here are some potholes to watch out for as you put together your private offering PR plan. Common mistakes include:
The Wrong PR Materials: Putting out PR and marketing materials that grossly deviate from the private placement memorandum on file with the SEC.
Pro Tip: Get your PR people involved early on in the process. Your PR agency and your law firm should work together from the outset to prepare your private placement memorandum (PPM). A well-drafted PPM should be a great marketing and sales tool, as well as a legal document.
Botching a Demo Day Event: Promoting an event that places potential investors in front of offering presenters runs the risk that the SEC will construe this as the actions of an unregistered investment advisor or broker-dealer.
Pro Tip: Your PR agency should be advised that, when promoting an event, refrain from referring specifically to any presenter's offering. Your lawyers will likely catch this if they are properly integrated with your PR and marketing team. Revising the materials can result in a significant loss of time and capital.
Different PR & Marketing Messages Across Different Mediums: Your legal compliance – and your marketing – materials should be confined to the four corners of the private placement memorandum on file with the SEC. Failing to unify them can lead to trouble with the SEC.
Pro Tip: Your elevator pitch to journalists, company websites, press releases, investor emails, and presenter communications are all sales tools. Use them. But be sure that they don't deviate from your formal offering memorandum or from one another. This is why, once you have tested the waters and chosen your safe harbor, you should draft your offering materials in a way that incorporates everything you want to communicate about your offering, along with the required disclosures. This way, you avoid the risk that outside promotional content on your website, press releases, or social media depart from the private placement memorandum.
Broadly Targeted Social Media Outreach: Investors acquired through social media, per Rule 506(c) must be accredited. Inartfully executed social media campaigns could be used against you in a case alleging violations of accredited investor requirements.
Pro Tip: Social media campaigns should be designed to target sophisticated investors. The SEC will examine the scope of dissemination and the substance of the content in making its determination.
The SEC has drastically expanded opportunities for start-ups to raise capital through crowdfunding and other private offering exemptions. As in most regulated industries, the rules and limitations to marketing, PR and advertising are manifold. Learn them. And then use them to your advantage. Once you have mastered the lay of the land, you can launch bold, creative and inspiring PR initiatives that think outside the box while still coloring inside the lines. Your less-informed competitors, navigating the minefield without a detailed map, will have difficulty keeping up.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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