FundersClub's Stance on General Solicitation
This week we’ve seen numerous articles in the tech press covering the SEC’s lift of an 80-year ban on what is known as general solicitation. The lift of the ban allows entrepreneurs, online fundraising and investment platforms, and other issuers to start marketing investment opportunities directly to the general public subject to specific SEC regulations. Below is an overview of how FundersClub views this new operating environment and its stance.
Overview
First, our decision-making framework: We’ve always made platform-wide decisions based on facts and circumstances that are known to benefit both investors and startups, not hype. This deliberate and facts-based approach is what leads to sustainable wins, which is our economic incentive as a VC.
Our stance on general solicitation is no different, which is why we’re opting to defer participation in general solicitation until it is a clear win for investors and startups. The reality is that as of today, top VCs, top incubators and accelerators, and the leading law firms advising investors and startups currently regard public fundraising as a question mark. Many are actively advising against it, and for example, are cautioning investors against companies who’ve participated in public fundraising to protect the investors.
While we believe in the merits of increased transparency enabled by general solicitation, at this moment both startups and investors who participate in general solicitation are being put at unknown risk. Although other online platforms appear to be shouting from the rooftops about the merits of general solicitation, it is a fact that those at the center of the startup ecosystem remain cautious and are not yet convinced.
The Issues
Overall, the key problem is it is still very much a grey zone. Startups that engage in general solicitation must verify all of their investors’ accreditation statuses, but the SEC didn’t specify exactly what’s required to do so. Failure to properly verify could force a startup into bankruptcy for blowing its securities exemption. The SEC has also proposed a new set of additional regulations which they can implement at any time. Aside from creating additional overhead, the penalty for slipping up on them is a one-year ban on fundraising, another virtual death-sentence for young startups. Because startups rely on the broader ecosystem to succeed (it takes a village to bring a startup to exit or IPO), it is irresponsible to pull startups in a direction that taints them with such risk. We aren’t anti-general solicitation; we’re simply calling for more clarification from regulators and agreement from the ecosystem to ensure startups and investors are protected before jumping in.
From the investor standpoint, we’re also concerned that general solicitation is currently being used to raise money under investment terms that investors may not fully understand. For example, we have already observed many instances where opportunities made available this week via general solicitation are being offered at different terms compared to what institutional investors like FundersClub are buying in at or seeing privately, with no disclosure made to the public investors that they are receiving worse terms. General solicitation has merits but the process will need to be carefully managed to protect both startups and investors in order to lead to sustainable wins.
Our Actions
We are in dialogue in Washington DC, in Silicon Valley, in Silicon Alley, with VCs, incubators/accelerators, angel groups, founders, lawyers, and others to arrive together at an ecosystem consensus before suggesting that public fundraising and investing is advisable for investors or startups.
At times you may notice we are quieter than others—we like to talk softly while carrying a big stick. I hope you know we are always working tirelessly, often behind the scenes, to advocate for the community’s best interests.
I’m very humbled by what the FundersClub community of investors and founders has accomplished to date as we continue to responsibly chart new territory. I look forward to funding the future together with you and to understanding how our team can continue to best serve you.