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Blog

Rule 148 the Next Frontier for General Solicitation

VerifyInvestor.com

On March 15, 2021, the SEC (Securities and Exchange Commission) instituted the brand-new Rule 148 which allows entrepreneurs to communicate more widely regarding investment opportunities in their funds during “Demo Days”. This is a major expansion to the existing “Demo Days’ framework. In essence, the SEC now allows specific communication that no longer is considered a general solicitation. This frees up the reins a little bit on entrepreneurs so they no longer need to tiptoe around conversations with potential investors. In the past entrepreneurs would need to hold off raising funds and/or use Rule 506(c) and comply with finding accredited investors to start on a private raise. Rule 506(c) allows issuers to generally solicit investors, however, not all start-up companies have the resources available to verify investors as accredited investors, which is a requirement to use the Rule 506(c) exemption.

So what communication is permitted by the SEC using Rule 148? The Answer is any meeting sponsored by one of the following:

  • Incubators and accelerators

  • Angel investor groups

  • Nonprofit organizations

  • State and local governments

  • Instrumentalities of state and local governments

  • Universities and colleges

A possible loophole to Rule 148 would be to use one of the above communication opportunities solely for your own company’s gain. So, there is a rule in place to avoid this misuse, which requires there to be more than one company at these types of “Demo Day” events.

Since so much business has moved online due to both convenience and of course the COVID-19 Pandemic, there is guidance on this as well. The SEC has stated that virtual meetings are permitted as long as, “the exemption for virtual events has been limited to individuals (i) who are members of a 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 the industry or investment-related experience.”

In addition to the specific venue for communication, the SEC has also laid out requirements for what type of information may be exchanged with potential investors.

  1. A notification of the offering or potential offerings from the issuer.

  2. The security type and amount of the offering.

  3. The potential use of the raised funds.

  4. How much of the offering is unsubscribed?

Anything else that diverts from these specific subjects is not permitted under Rule 148.

What does an incorrect conversation with a potential investor look like? Please find examples below:

  • “Our new fund is going to be big. We really think you should invest, and we can offer a guaranteed rate of return for early subscribers.” This is considered negotiation and investment advice, so it is not permitted.

  • “If I get these investors to subscribe at this meeting before we general solicit, I will get a huge bonus.” Any employees may be paid a reasonable administrative fee to attend an event, however, they can receive additional compensation for any intros or sales.

Overall, this new law does present new freedom for issuers to find new investors, however, it is still very important to review and understand the law in order to avoid misusing Rule 148. To stay up-to-date with private equity news stay tuned to the VerifyInvestor.com Blog.

Updated 8/26/2023

As great as Rule 148 is for discovery, it is still very restrictive. Being able to publically advertise your fund is a much more efficient way to raise the capital that you need. “General Solicitation” is still a fantastic tool for funds that need investors. Being able to post on your website, social media, promote at events, and message investors in group chats are among the best ways to recruit investors in such a competitive private equity market.

However, even something as simple as a short phrase about your fund in a stream chat constitutes general solicitation and you must utilize the Rule 506(c) exemption and only accept investments from accredited investors.

Luckily, if funds and staff are low, a third-party verification service like VerifyInvestor.com can be utilized to verify your investors as accredited investors.

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