On January 10, 2017, the House of Representatives passed “Helping Angels Lead Our Startups Act” (the “HALOS Act”), which is intended to ease formal restrictions on general solicitation. The HALOS Act still needs to be approved by the Senate, and signed by the President prior to becoming law, and the Securities and Exchange Commission (“SEC”) must implement the requirements of the HALOS Act before effectiveness.
Demo Days Confusion
In an effort to gain traction in commercial markets and advance fundraising efforts, many start-up companies have participated in “demo days,” typically organized by local venture capital organizations, accelerators, colleges and similar organizations. But, there was some ambiguity whether start-ups could sell securities to investors introduced to them at demo days. Regulation D, a set of common securities exemption relied on by start-ups, cannot be relied on if the start-up engages in general solicitation. General solicitation includes, “any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.” The concerns received more attention in the wake of the JOBs Act permitting general solicitation under Regulation D, but with significant procedural hurdles for issuers.
The HALOS Act attempts to clear up this ambiguity and instructs the SEC to amend Regulation D under the Securities Act to exclude from the prohibition against general solicitation presentations and communications made on behalf of an issuer at events with specified sponsors (including nonprofit organizations, colleges or universities, venture forums, and angel investor groups that are composed of accredited investors) where:
- the advertising does not refer to any specific offering of securities by the issuer;
- the sponsor does not engage in (i) offering investment recommendations or providing advice to event attendees, (ii) engage in an active role in any investment negotiations between the issuer and investors attending the event, (iii) charge attendees any fees other than administrative fees, (iv) does not receive any compensation with respect to such event that would require registration of the sponsor as a broker or a dealer with the SEC; and
- no specific information regarding an offering of securities by the issuer is communicated by or on behalf of the issuer (other than that the issuer is in the process of offering or planning to offer securities, including (i) the type and amount of securities being offered, (ii) the amount of securities that have already been subscribed for in the offering and (iii) the intended use of proceeds of the offering).
While the HALOS Act would certainly make it easier for start-ups to capitalize on efforts at demo days, if the HALOS Act becomes a law, the SEC will still need to create regulations to implement. In particular, unless the SEC makes an exception for demo day presentations, these presentations will be subject to the anti-fraud requirements of the federal and state securities laws. If the HALOS Act becomes law, start-ups engaging in fundraising at demo days should make sure that any presentation is scrubbed for any material misstatements or omissions that investors would consider when making an investment decision.