Outing Startup Financings

William Carleton, Contributing Editor, VCExperts

A key, legal rule for startups in the US seeking private financing changed in the fall: it is now okay to "generally solicit and generally advertise" that you are seeking funds.

The paradox of this rule is that it makes a lot of startup financing activity somewhat more private than it had been.

How's that?

The new rule set expressly preserved the old ban on "general advertising and general solicitation," while tacitly conceding that start up investors could self-police whether and how they met the accredited investor standard.

For those wishing to advertise their financing, the protocol of self policing accredited investor status was upended.

An immediate effect of the new rule set was that many startup founders took the measure of the price to be paid for generally soliciting, and re-committed to the old way of conducting financings. And, with all the attention to being paid to what constitutes "general solicitation and general advertising," this group of founders got quieter than they otherwise would've been: more careful not to discuss financing plans with reporters; screening pitch event opportunities more carefully; asking existing and prospective investors not to tweet about the deal.

Other founders launched boldly into the new world of private financing that is really public financing with a federal securities registration exemption. And a cottage industry of accredited investor verification shops is following to support them.

As the year begins, I'm noticing more and more "outing" of startup financings by third parties – companies, associations and individuals – possibly picking up the information slack caused by those choosing to go more conservative.

What happens if you are extra good about not advertising your offering, but somebody unknown to you tweets about it?

We can probably all agree that if the NSA knows about your Rule 506(b) (that's the version of the rule that continues to prohibit "general solicitation and general advertising"), you have not blown the exemption.

Similarly, when you file your Form D within 15 days of first sale, even though you're offering is ongoing, you haven't blown the exemption either. That's in spite of the fact that your filed Form D is easily accessed online by anyone.

But what duties might you have to shut down other channels of information, leaks of your financing plans?

Those wishing to "generally solicit or generally advertise" must take "reasonable steps" to verify the accredited status of their investors. If you opt for the other camp, the old rule where advertising is prohibited, will you end up having to swear your employees and investors to secrecy?

William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at