The SEC recently adopted Rule 148 to address whether companies that present at “demo days” held by angel investor groups, incubators or accelerators are participating in a “general solicitation” for investments under securities laws. With angel groups starting to host demo days again, sponsors, organizers and participants of demo day programs should take a look at Rule 148.
Every sale of a security must either be registered with the SEC or exempt from registration. Startups most commonly raise capital through private placements, which are transactions that meet the requirements of a specified exemption from registration with the SEC. Certain exemptions are not available if the company engages in a general solicitation. When a company pitches at a demo day, is it making an offer to sell securities via a general solicitation? Not if the demo day meets the requirements of the new Rule 148.
Rule 148 provides that a company’s communications will not be deemed to constitute general solicitation or general advertising if made in connection with a demo day, provided that the demo day meets certain requirements.
- Advertising for the demo day cannot reference a specific offering of securities by the issuer.
- The sponsor of the demo day may not: (i) make investment recommendations or provide investment advice to attendees of the event; (ii) engage in any investment negotiations between the issuer and investors attending the event; (iii) charge attendees of the event any fees, other than reasonable administrative fees; (iv) receive any compensation for making introductions between event attendees and issuers or for investment negotiations between such parties; or (v) receive any compensation with respect to the event that would require registration of the sponsor as a broker or a dealer or an investment adviser.
- If an issuer desires to convey information about its capital-raising efforts at a demo day, the information must be limited to a notification that the issuer is in the process of offering or planning to offer securities, the type and amount of securities being offered, the intended use of proceeds of the offering, and the unsubscribed amount of the offering.
In addition, online participation in the demo day event must be limited to individuals who are members of or otherwise associated with the sponsor, who are accredited investors (or who the sponsor reasonably believes are accredited investors), or who have been invited based on industry- or investment-related experience (which should be disclosed in the public communications about the event).
Rule 148 also defines the term “angel investor group” to mean “a group of accredited investors that holds regular meetings and has defined processes and procedures for making investment decisions, either individually or among the membership of the group as a whole, and is neither associated nor affiliated with brokers, dealers, or investment advisers.”
We are all looking forward to attending these events again. Demo days are a great way for startups to access capital and mentorship. Rule 148 is a helpful safe harbor for companies presenting at demo days when also conducting or planning to conduct a private placement under an exemption from registration that does not permit general solicitation. If sponsors and presenting companies satisfy or meet the rule’s requirements, participating companies will not be deemed to have engaged in a general solicitation by presenting at a demo day. Thus, exemptions from registration where no general solicitation is permitted (such as Securities Act Section 4(a)(2) and Rule 506(b) of Regulation D) may still be available for companies that meet the other requirements of such exemptions. Rule 148 offers some welcome flexibility for early-stage companies seeking to increase their profile in the investor community.