What started off as the usual demo day for the Entrepreneurs Roundtable Accelerator in New York quickly showed how the JOBS Act’s new rules on fundraising have clamped down the way startups pitch—or have they?
Over and over, the audience at last month’s ERA demo day was told the companies on stage were not seeking funding, which was taken by many as a response to JOBS Act provisos that went into effect on Sept. 23 regarding general solicitation.
Thanks to some fuzzy language in the law, opinions vary greatly among demo day organizers across country such as the TechLaunch accelerator in Clifton, NJ and the Aggie Angel Network in College Station, TX on what triggers the rules.
Though there has been no regulatory crackdown yet, some publicly conducted demo days may walk the line of general solicitation for funding. Some say the rules apply if a startup pitches before any audience, others believe the law applies only if startups mention their funding aspirations.
General solicitation requires startups to make certain filings with the Securities and Exchange Commission. That can be a prohibitive drain on time and resources for startups that are just emerging—though the penalties can be even worse. If startups engage in general solicitation but do not comply with the filing rules, they may be banned from raising funds for one year.
On one hand, the federal law loosens the collar for startups to discuss with accredited investors their plans to raise funding. But differing interpretations on what constitutes a general solicitation have spurred changes at some demo days.
For the ERA team, that meant nixing public talk of funding. Meanwhile, some programs have limited attendance to their demo days to accredited investors only or barred reporters from writing about the presenting startups, and yet other demo days have made no changes at all.
In the past, TechLaunch CEO Mario Casabona says, startups freely presented their technology, financial projections, and funding needs at demo days. That changed in September when the general solicitation rules went into effect.
“We don’t know, as the promoters of demo days, where the boundaries are,” he says. “If you take the JOBS Act literally, we can’t even talk about projections or raising money.”
He believes demo days will not come to a halt, but predicts the focus will shift to technology descriptions rather than pitches that talk dollars and cents for investors. “Whoever is putting together demo days will have to be careful,” Casabona says.
There seems to be a bit of disconnect, he says, between what the rules imply and the reality of how deals get done. Even if offerings were made to startups after demo days, Casabona says, the nitty-gritty details such as negotiating the terms of the deals all happen privately rather than publicly.
TechLaunch had its most recent demo day, with investor pitches, on Sept. 19, days before the rules went into effect. But Casabona believes that will change for everyone in the future.
“We’re going to see more and more of the demo day format that ERA put together,” he says.
For now, though, there are different views on how the regulations should be handled, he says. “One interpretation is to continue doing business as you have been,” Casabona says. “I’ve heard others say you can’t even have demo day.”
With so many grey areas yet to be defined, he plans to keep a close eye on what develops. “I’m looking at the next six months to see how this shakes out,” Casabona says.
Getting the federal government, once the shutdown is over, to step in again to clarify how the rules apply to demo days might not be the best solution by his reckoning. “Whenever we get the government involved in telling entrepreneurs how to do business, I’m always a little reluctant on how successful that’s going to be,” Casabona says.
Organizations such as the Angel Capital Association, he says, are lobbying to make sure that rulings under the JOBS Act will not be too harsh and that where will be
