At the 1932 Democratic National Convention, the live band at one point burst into “Happy Days are Here Again”, FDR’s favorite, drawing raucous cheers from convention delegates. It went on to become the Democratic Party’s unofficial theme song for years to come. The song is also associated with the repeal of Prohibition shortly after FDR’s election, sporting signs saying “Happy Days are Beer Again”. And after the new rules passed last month by the Securities and Exchange Commission on how “demo-days” may be promoted without violating the securities laws, many of us could be forgiven if we break out into “Demo Days are Here Again”!
Welcome to Part Two of my deeper dive series into the SEC’s recently promulgated exempt offering amendments. The final rules release could be found here, my initial post on the release here and Part One of the series on the new higher exempt offering caps here.
Like many others in the innovation ecosystem, I get lots of invitations to attend so-called demo-days or pitch days at which startups are invited to present to an audience that ostensibly includes potential investors, with the aim of securing investment. Promoters of demo-days broadly advertise these events over the internet and through email blasts. Yet since the most commonly used offering exemption prohibits the use of general solicitation, I’m often left scratching my head, hopefully not over a bad case of pityriasis capitis, thinking how this is not a blatant securities law violation.
That’s because a general solicitation is defined in Rule 502(c) to include “any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.” Under previous SEC guidance, a demo day presenter would not be deemed to have engaged in general solicitation if the promoter limits attendance to individuals either with whom the startup or the promoter has a pre-existing substantive relationship or that have been contacted through an informal, personal network of experienced, financially sophisticated individuals, such as angel investors. But for most demo day events, that doesn’t get enough people in the room.
New Rule 148
Under new Rule 148, a demo day communication will not be deemed to constitute general solicitation or general advertising if certain conditions are met with respect to the issuer, advertising content, the promoter and communications concerning an offering. There are additional limitations on virtual events.
First, more than one issuer must participate in the event. This is intended to prevent a promoter from holding an event that is essentially a sales pitch for one issuer’s offering while calling it a “demo day.”
Second, no sponsorship by brokers, dealers or investment advisers. The idea here is to limit the exemption to events sponsored by organizations less likely to have a profit motive for their involvement in the event or whose sole or primary purpose is to attract investors to private issuers.
Third, if the demo day is organized by an angel group, the group must have “defined processes and procedures” (although not required to be in writing) for investment decisions.
Fourth, no referencing any specific offering of securities by an issuer in any event advertising.
Fifth, sponsors may not provide investment advice to attendees, help negotiate an investment, charge fees other than reasonable administrative fees, receive compensation for making introductions between attendees and issuers, or receive any event compensation that would trigger registration as a broker or dealer under the Securities Exchange Act or as an investment adviser under the Investment Advisers Act. The rationale here is to limit the potential for a sponsor to profit from its involvement or to have a potential conflict of interest due to its relationship with either the issuer or investors attending the event.
Sixth, information that may be communicated regarding an offering of securities is limited to notification that the issuer is in the process of offering or planning to offer securities, type and amount of securities being offered, intended use of the proceeds and unsubscribed amount.
And lastly, online participation in the event is limited to individuals associated with the sponsor organization (e.g., members of an angel group or students, faculty and alumni of a university), individuals the sponsor reasonably believes are accredited investors and individuals invited to the event by the sponsor based on industry or investment-related experience reasonably selected by the sponsor in good faith and disclosed in the public communications about the event. These participation restrictions address concerns about events otherwise making broad offering-related communications to non-accredited investors, particularly in light of the increasing prevalence of virtual “demo days” which are more accessible and widely attended by the general public.
Overall, new Rule 148 will allow startups greater flexibility at demo and pitch day events to say a few high-level things about their offerings without the uncertainty as to whether they’re blowing their offering exemption in the process. Demo days are here again!