The future of ‘demo days’ in an era of general solicitation
FORTUNE — Beginning on Monday, private companies will be legally permitted to “generally solicit” investors. And it may forever change startup “demo days,” which have become ubiquitous in Silicon Valley and beyond.
For decades, private issuers have been prohibited from publicly passing the hat. That’s why you’ve never seen advertisements for shares in hot new tech startups or venture capital funds. It’s also why so many private company CEOs refuse to discuss fundraising while on television or on a conference stage. Protecting grandma from con artists has outweighed helping new companies find investors.
The one exception to all of this has been “demo days” — events that many startups consider to be their cotillions. They get 10 or 15 minutes to explain their product to a large in-person audience, usually in the hopes of securing investment interest. In many cases, funding goals are made explicit.
Such solicitation is obviously in violation of SEC policy, but the Agency has historically turned a blind eye. In fact, I can’t find a single instance in which the Agency has taken action against either a demo day organizer or presenter.
But now things are about to change.
Last year’s federal JOBS Act did away with the general solicitation ban, and earlier this summer the SEC codified the legislation — saying that private issuers would be free to generally solicit come this Monday, September 23. The only new requirement would be that issuers would need to verify that investors are accredited (for individual investors, that means net worth in excess of $1 million and/or annual income in excess of $200,000). In other words, investors would have to submit documentation like W-2 forms, rather than just check a box affirming that they meet the standard.
On the surface, this seems great for demo days. They can proceed with business as usual, without even the faintest threat of regulatory scrutiny. Just make sure the participating startups acknowledge that they are generally soliciting, when it comes time to file the appropriate SEC paperwork.
The problem, however, is that the SEC also proposed a bunch of other rules that could make life both difficult and expensive for general soliciters. For example, such issuers would be required to file a Form D with the SEC at least 15 days prior to the beginning of general solicitation, and also file an amended Form D within 30 days after the offering is terminated (either because it closed successfully or was abandoned). And Failure to do so could cause the SEC to ban them from subsequent securities issuance for a year or more.
These extra rules are not yet law — the comment period remains open — and may get watered down before a final vote (after which those already in the midst of general solicitation will be “transitioned” to the new scheme).
But what happens if next week’s demo day participants acknowledge that they are general soliciters, and then the full spate of new rules is enacted? It’s hard to imagine that future demo day participants could just return to the good old days of pretending they aren’t generally soliciting, so as to avoid the new burdens. Once that bell has been rung, the SEC will hear it.
So how should demo day organizers continue to run their events, while allowing all participants the utmost flexibility?
The answer may be to insist that presenters not discuss investments or capital requirements from the stage. After all, the started purpose of these events was to demonstrate new technologies, not demonstrate ROI potential. If investors want to pull them aside afterward, so be it.
Sure everyone in the crowd will know why the startup is really there, but it’s plausible deniability for everyone. The company, the investors and the SEC.
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