Effective as of March 15, 2021, the Securities and Exchange Commission (the “SEC”) adopted the new Rule 148 which permits entrepreneurs to speak more openly about opportunities for investment in their new enterprises at “Demo Days.” The newly adopted rule enumerates certain communications that the SEC will not deem to fall within the definition of “general solicitation” or “general advertising”. This exemption is important for issuers and investors, as an issuer that engages in general solicitation must either wait before raising funds through a private placement or limit the offering to comply with Rule 506(c). Rule 506(c) does permit a company to use general solicitation, however, issuing companies are hesitant to raise funds through a 506(c) offering due the rule’s cumbersome requirement to make a reasonable inquiry into the finances of each potential investor to verify that such investor does qualify as an “accredited investor”.
Outlined below are the essential elements of the new Rule 148:
Entities Who May Sponsor Demo Day Events
Communications made at seminars or meetings sponsored by colleges, universities, state or local governments or instrumentalities of state and local govenments, nonprofit organizations, angel investor groups, incubators and accelerators are exempted by the Rule 148 as permitted sponsors.
Participation by Issuing Companies in Demo Days
More than one issuing company must participate in order for Rule 148 to apply. This requirement comes as a result of concern about the potential misuse of the exemption by organizations which desire to hold a sales pitch for the securities of only one issuer while disguising the pitch under the cloak of Rule 148.
Virtual Demo Days
COVID-19 has accelerated the prevalence of events conducted in a virtual format. Such events offer the opportunity for broad offering-related communications to non-accredited investors to an extent far greater than would be available in an in-person format. For this reason, the exemption for virtual events has been limited to individuals (i) who are members of a the sponsor organization or are otherwise associated with such organization, (ii) that the sponsor reasonably believes to be accredited investors, and (iii) who have been invited to the virtual event by the sponsor based upon industry or investment-related experience.
Permitted Information about Securities Offerings
Under Rule 148, information about the offering of securities that issuers may provide is limited to (i) notification of the offering or planned offering of securities by the issuer, (ii) the type and amount of securities being offered, (iii) the issuer’s intended use of proceeds from the offering, and (iv) the unsubscribed amount in the offering.
Scope of Sponsor’s Permitted Activities
At the seminar or meeting, a sponsor is not permitted to engage in any investment negotiations between the issuer and attendees of the event or to provide any investment recommendations or advice. The sponsor is also limited to collecting reasonable administrative fees, and may not receive any compensation for making introductions between the issuer and prospective investors, for investment negotiations between the parties, or those that would require the sponsor to register as a broker or dealer under the Exchange Act or an investment adviser under the Advisers Act.
