some flexibility on determining public versus private offerings.
Keeping regulators from becoming even more hands-on with startups, he says, may be crucial to the health of the nation’s innovation ecosystem. One of the advantages the U.S. possesses over other countries, he says, is letting entrepreneurs build their companies without bureaucratic hindrances.
“I’m concerned that things like the JOBS Act can put some roadblocks in the way of entrepreneurs’ ability to launch their startups,” he says.
In some cases, the potential effects of the new general solicitation rules on demo days have caught folks completely off guard. Phelan Riessen, co-founder of SD Tech Scene and app development firm Digithrive in San Diego, has been planning a demo for Nov. 7 and is now sorting out the differences between demos that show off products and pitches for investors. “I need to consider how we’re doing our pitch event,” he says.
The objectives for his forthcoming demo day, he says, are to give entrepreneurs some practice pitching and to show the community the type of startups San Diego is home to. Now, Riessen is in a bit of quandary. “I don’t know how we can do a pitch event without talking about financials,” he says.
Excising talk of money from the proverbial elevator pitch may be a challenge, but Riessen says he wants to keep the event intact and comply with the rules. He believes that startups looking for funding will have to separately meet with potential investors to vet them as accredited.
“It needs to be thought out to make sure we fall under the guidelines,” he says.
As planning for the event proceeds, Riessen says he is reaching out to legal experts for advice on how to proceed. For now, he continues searching for answers. “What is the breaking point?” he asks. “Where do we stop and say we can only do ‘this’ or we can only do ‘that’?”
Defining what constitutes a demo needs to be sorted out as well, says Omar Hakim, managing director with the Aggie Angel Network. “Some people might refer to a startup company’s pitch to an established angel group like ours as a demo day,” he says. “We don’t think of that as a demo day.”
Hakim says his network makes sure all attendees of such pitches are accredited investors. That way the startups can say they have not violated SEC rules. “We think going forward that element is unchanged,” he says.
The lack of consensus on demo day formats may contribute to the confusion on how the rules apply. Hakim says other organizations conduct their events far differently from his.
“They’re going to elevator pitch competitions, they’re going to ‘Shark Tank’-like public events where they pitch their companies,” he says. The concern is, he says, that the companies who pitch in such venues may be tripping up on general solicitation rules—with a one-year ban serving as a very stiff punishment for young companies.
“That’s like saying you’re barred from oxygen for a year,” he says.
This new risk factor has led Aggie Angel to closely scrutinize startups to find out who else the entrepreneurs have talked to and what other forums they have presented in.
“If we think they’ve been on a tear talking to lots of different groups and trying to raise money incorrectly doing general solicitation, this may put off our investment,” Hakim says.
Companies that spread too much information about their plans over the Internet might also draw unwanted attention from the SEC. “If we put money in there, it may go into a lockbox if the company gets barred from raising money for a while,” he says. “That puts our investment in jeopardy.”
Startups that simultaneously seek conventional investments and money from crowdfunding also raise concerns, Hakim says. “How do we know their crowdfunding activities haven’t triggered these problems?” he asks.
That may drive away angel investors who fear the penalty may kick in, he says. “Since we don’t yet have the full rules on crowdfunding this remains an unknown,” Hakim says. So far the available rules, he says, have added a layer of complexity to raising funds that startups had not considered before.
With the new regulations less than one month old, he says Aggie Angel is in wait-and-see mode.
“We’re going to look for more guidance from the SEC on how they’re going to interpret this,” he says. The Angel Capital Association, he says, also plans to bring the concerns of its members to regulators. “There’s some hope there maybe some course corrections,” Hakim says, “but this is now the law of the land.”
The breadth of what the new rules may cover could lead to a bit of overzealous self-policing, he says, that negatively affects the startup-investor ecosystem.
“The bottom line is I think there is going to be less investing occurring,” Hakim says. “That’s the opposite of what I think the JOBS Act is all about.”
