Startups and emerging companies raising money almost always have to confront this question: How to respond when the media calls?
Media coverage can be great for a startup—especially one that is trying to get traction on the use of its product.
However, when companies are raising money, they have to understand the “rules of the road” when it comes to securities law compliance and talking to the media. And there have been some recent changes to the rules resulting from the JOBS Act.
Can you talk to the press when they call? (By the way, you should expect that they will call).
The Short, Safe Answer
In general, if you are raising money in a securities offering, the safest thing to do when the media calls is not to talk to them at all. If someone from the media calls, politely decline to talk to them.
Example dialogue between media and founder:
Media: “Hi. I saw from a recent Form D that you filed with the SEC that says you are in the midst of a $5 million Series A financing. I’d love to talk to you about it.”
Founder: “I am sorry. But we do not talk about our securities offerings to the media.”
The Exceptions to the Generalized Rule
Of course, this is a generalization, and there are exceptions. Let’s talk about them.
506(c) Offerings. Rule 506(c) of Regulation D, adopted by the SEC following the passage of the JOBS Act, allows companies to generally solicit their private securities offerings. You can literally run ads in newspapers if you want. If the media calls, of course you can talk to them.
Is your offering a 506(c) offering? Your securities counsel can guide you through the pros and cons of 506(c) offerings versus 506(b) offerings (non-generally solicited offerings). But, you should know that most private companies raising money are not taking the 506(c) path. Most are choosing not to generally solicit or generally advertise their offering. There are a number of reasons for this. The most significant are:
- If you generally advertise or solicit investors for your offering, you have to obtain additional information from your investors to verify that your investors qualify as accredited investors. In particular, you have to ask your investors for copies of their financial statements or tax returns or Forms W-2. Or have a third party obtain such information. As you can imagine, investors don’t like this! This is the main reason most companies don’t take the 506(c) route.
- In contrast, if you do not generally solicit or advertise your offering, you can rely on certifications from your investors and you are not required to ask for the additional verification information.
- Another issue is that the SEC has proposed extremely onerous rules for 506(c) offerings. These proposed rules are not yet final and may change before they are implemented, but the SEC’s proposal has scared many companies off 506(c). Of course, that may have been the SEC’s goal in proposing the rules.
Talking About Your Business Only in the Ordinary Course. It is more risky from a securities law point of view, but it is possible to talk about your business to reporters during the course of an offering as long as you do not discuss the offering itself. The securities law risk here is that if your media activity spikes right before or during your offering—say, you start issuing press releases discussing developments in your business without having previously done so in a similar manner—the securities regulators or angry investors might later assert you were “priming” the market for your offering. In other words, even if you weren’t expressly talking about your offering, you were in fact pumping up your offering. Securities regulators are wise to the ways of entrepreneurs in priming the market and may require that you defer your offering for a period of time. To minimize this risk, discussions with reporters about your company during an offering should be consistent with your past practice to the extent possible.
Example dialogue between media and founder:
Media: “Hi. I saw from a recent Form D that you filed with the SEC that says you are in the midst of a $5 million Series A financing. I’d love to talk to you about it.”
Founder: “I am sorry. But we do not talk about our securities offerings to the media. But we would be happy to talk about our business solution.”
The Offering Is Closed. Sometimes a company will complete its round and want to issue a press release. This can be fine, but only if the company is not going to start fund raising again for a considerable period of time.
Why? Because if you are going to start fundraising immediately, or your fundraising is ongoing due to the fact that, for instance, you just closed a convertible note offering, you can’t issue a press release without being considered to have generally solicited or generally advertised your offering.
Traps for the Unwary
Sometimes companies will want to get their offering started with people they know, and not generally solicit their offering. In other words, start with a Rule 506(b) offering. But then, to close the round, they will want to generally solicit or generally advertise their offering.
This is a trap for the unwary.
If you trip the wire—if you generally solicit your offering—you will have to go back to your investors and seek the additional information to verify they are accredited investors.
What To Do In Your Offering
If you are going to raise money in a securities offering, you will want to know the rules and follow them. The consequences for not following the rules can be harsh, including potential personal liability and disqualification from making future offerings.
