Start Up Capital

New rules have just been published by the Securities and Exchange Commission (SEC) that are designed to allow entrepreneurs to advertise and do general solicitation for investors. These rules also apply to real estate investors who borrow funds from private lenders. 

In the past, these activities have been prohibited by the SEC. This prohibition makes it difficult to stand in front of an unscreened group of prospective investors, and announce “I am looking for funds.” In effect, the SEC considers that you are doing a general solicitation for a security.

The SEC defines a security as “any note … bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement,” and considers private lending for a real estate investment to be a security.

I attended a recent meeting on this topic, organized by Seattle Angel investor Josh Maher. The topic was addressed by local Seattle attorney Bill Carleton, a member of Angel Capital Association. He also has an excellent blog on investment capital at www.wac6.com where you can find more specific information on SEC rules and regulations.

The new rules proposed by the SEC impose additional filing requirements, submission of all advertising materials to the SEC, requirements to qualify investors, and penalties for missed deadlines or failure to comply. Mr. Carleton felt that this would add to the cost and burden of preparing exemptions and syndications for entrepreneurs like us.

There are certainly legal and practical ways for entrepreneurs to “stay under the radar” of the SEC, and Mr. Carleton suggested that either the existing 506, Regulation B or D exemptions would be preferable to what is currently proposed as Regulation C by the SEC.

There are other sources of start-up capital for entrepreneurs, new businesses and real estate investors, that you might want to explore. Here are a few that were mentioned at the meeting I attended:

http://www.thecrowdcafe.com/  crowdfunding research, resources and news

https://circleup.com/  matching consumer entrepreneurs with passionate investors

http://techcrunch.com/  matches investors with tech companies

https://angel.co/  AngelList, where startups meet talent

http://seattleangel.com/  the angel incubator in Seattle

Many real estate investors file an exemption with the State Department of Financial Institutions (DFI), and only use one private lender on an investment property. Others work only with equity rather than debt partners. Others stick to family and friends when borrowing funds, and only those that qualify as accredited investors. I am not an attorney, and this article should not be construed as legal advice.

If you are raising money for your real estate investments, it makes sense to discuss legal issues with your real estate attorney first.

Photo courtesy of freepictures.me

Advertising for Investors?

A local angel investor group sponsored a meeting July 23rd at Think Space in Redmond, on the recently-published rules proposed by the SEC, in response to a congressional initiative to allow advertising and general solicitation for  investors.

Angel investors are typically well-connected, wealthy individuals who generally use their own money for investment and come with none of the following Venture Capitalist constraints such as: they don’t go on boards, they don’t need to put in lots of capital (in fact, they usually don’t want to), they prefer dead simple terms (as they often don’t have legal support), they understand the experimental nature of the idea, and they can sometimes decide in a single meeting whether or not to invest. 

Bill Carleton, a local Seattle attorney and member of the Angel Capital Association was the presenter, and here are my notes from that meeting:

Most of the meeting focused on SEC 506 exemption, Regulation D,  which has now been modified with the new exemption, Regulation C, which allows for advertising and general solicitation. But if borrowers and issuers sell only to accredited investors, not as much disclosure is needed

The original Reg D exemption meets state rules; with a requirement to file for exemption within 15 days of a sale; this is typically a private offering not an IPO; issuers were not to engage in advertising.

JOBS Act addressed the issue of general solicitation; angel investing specifically, not crowd-funding;

SEC to remove prohibition on general advertising and solicitation; exclude non-accredited investors, every investor must be accredited; investor must take reasonable steps to verify accredited status.

Rules have been published by SEC about two weeks ago; links to final rules are available on Carleton's website at www.wac6.com.

SEC is not up-to-speed on start up entrepreneurs that meet with Angel Investors in coffee shops or tweet about their business opportunities over social media. Most of the new rules come with more filings, annual renewals, and penalties for missing deadlines.

Reg D filing is required within 15 days after sales; but under new rules, Reg D has to be filed first before Reg C allows for being able to advertise.

File an advance form D, annual updates if open for more than a year, and file a notice when everything is wrapped up; There is a one-time only 30-day waiver; if you miss the deadlines, then cannot use 506 b or c for one year.

The issuer must identify the manner in which investors are qualified; advertising materials must be uploaded to SEC website.

Disgruntled investor has a recission right; These proposed new rules by new SEC Director are out for comment now.

Rules lifting the ban on general solicitation will be in effect 60 days after publication.

506B former exemption for online platform for "walled garden" is not general solicitation if all members are screened as accredited investors; good idea to hang onto 506B exemption.

Final rules say that investor must take reasonable steps to verify accredited status. Issuer cannot rely only on the investor's statement. Examples include looking at w2s or reports filed w IRS, credit check, etc. Can get letter from broker/dealer, CPA, attorney, registered investment advisor. May cost some thousands of dollars to verify. Carleton recommended that issuers stay in 506B. Do it the old way.

File Form D in advance if you think you will want to advertise. Be sure that all general solicitations go to SEC. Don't miss deadlines. Regulatory compliance, pitch events may have to establish criteria, have done 506 exemption...

Crowd funding rules have not been released yet.

Public events are problematic.

504 offering limited to $1M. Still best only to accredited investors. Seed funding best found among family and friends, accredited investors, keep it off the radar. Best source for seed funding. Work the network that you already have.

Really hard to get someone you don't know to give you $. Angels have stepped up to fill void left by VCs who have moved on. Small amounts of funding may be available through grants, small business funds, etc.

If you want to keep options open, file Form D 15 days in advance. Filing fee is $300. $10K in legal fees is typical. Form D will be more complicated, talk about how to qualify investors.

Just stick with accredited investors to be on the safe side. Tomorrow's blog will feature good resources for start-up funding for entrepreneurs.

 Photo courtesy of freepictures.me