Pitching to the Unknown

Pitching your company to investors and trying to raise money involves meeting a lot of people you have never met before. This is true regardless of the depth of your network. To raise money for a startup, you have to work hard and meet a lot of new people.

The SEC has issued rules under the JOBS Act governing how you can raise money for your startup. These rules says that if you “generally solicit” or “generally advertise” your offering, then you have to ask your investors for the following information:

  • their personal financial statements or personal tax returns.

If you do not generally solicit or generally advertise your offering, you can rely on a simple certification from the investor. 

Most companies do not want to have to ask their investors for their personal tax returns or financial statements. So they choose to not generally solicit or generally advertise their securities offerings.

But what does this mean exactly? Can you pitch someone referred by a friend? Someone you previously had no connection to? Or would that constitute general solicitation or general advertising, making your life more difficult?

The SEC recently gave guidance on this question. I have quoted the SEC’s guidance below. The answer is–you can pitch someone you just met. This will not blow your Rule 506(b) securities law exemption. But you need to comply with all of the conditions of the exemption. The below guidance from the SEC is helpful because it makes it clear that you do not have to have a pre-existing, substantive relationship with everyone you pitch. In all instances you should work closely with securities counsel throughout the course of your offering.

Question 256.27

Question: Are there circumstances under which an issuer, or a person acting on the issuer’s behalf, can communicate information about an offering to persons with whom it does not have a pre-existing, substantive relationship without having that information deemed a general solicitation?

Answer: Yes. The staff is aware of long-standing practices where issuers and persons acting on their behalf are introduced to prospective investors who are members of an informal, personal network of individuals with experience investing in private offerings. For example, we acknowledge that groups of experienced, sophisticated investors, such as “angel investors,” share information about offerings through their network and members who have a relationship with a particular issuer may introduce that issuer to other members. Issuers that contact one or more experienced, sophisticated members of the group through this type of referral may be able to rely on those members’ network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. Whether there has been a general solicitation is a fact-specific determination. In general, the greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer or persons acting on its behalf through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation. [August 6, 2015]