If the SEC Restricts How Startups Solicit Money, What Will Happen to Demo Days?
BY Jeremy Shure
Worst-case, the SEC's restrictions could eliminate Demo Days, the "coming-out" party for startups.
Now that the Securities and Exchange Commission (SEC) ended the 80-year-old ban on soliciting private investments, the SEC has proposed regulations regarding a startup's solicitation of money. These proposals call into question whether Demo Days will be legal or a target of the commission. Demo Days may be in danger, because the SEC hasn't provided enough clarity in their proposal as to what constitutes “solicitation.”
For now, Demo Days are in a holding pattern.
Demo Days are the "coming out party" for funding many great startups, such as OnSwipe, Airbnb, SendGrid, and Dropbox. They are also a highlight of the startup community, where companies (often graduating from accelerator programs) get 5-10 minutes to explain their product to a large audience of investors and media, typically with the goal of securing investment interest.
But the SEC has proposed regulations that would require startups to file comprehensive disclosures about their public pitches in advance. They would also sharpen the terms under which a startup may solicit money. If a startup fails to abide by the rules, they could be banned from fundraising for a year or longer.
This presents a massive hurdle for startups. Young companies are often so early-stage that they can’t answer such detailed questions, let alone meet those date requirements. Perhaps the SEC proposals were created with more established companies in mind; the cycle of fundraising for younger companies is less predictable and far more whimsical. Fortuitous meetings and Demo Days mean a lot.
Until now, the SEC turned a blind eye to general solicitation at Demo Days.
Does simply presenting to investors at a Demo Day count as general solicitation, even if the startup doesn't mention funding? Catherine Mott, a Pittsburgh investor who formerly led the Angel Capital Association, said, "I’d like the SEC to either define general solicitation more clearly so entrepreneurs are very clear what they need to do, or carve out demo days and venture fairs."
Some say the SEC’s proposed rules would apply to startups pitching to any audience, and others believe the rules would only apply if the startup mentions its fundraising goals to that audience.
Many accelerators will make tweaks to their Demo Days, but otherwise will go ahead with business as usual. An anonymous source at one of the United States’ most esteemed accelerators says, "regarding Demo Day, it's fuzzy, and will shake out over the next six months. We are not making investor asks at demo days. We're focusing on demos, and we think that's fine. Investors who might come won't be shy, I'm sure. Once it's more clear (now that government is reopened and all) we may tweak."
These proposed rules are not yet law. Now that the government is back to work, it’s time for the SEC to provide guidance and carve out exceptions that make it easier for entrepreneurs to raise capital.
As a co-founder of the Emerging Companies Practice at Akerman Senterfitt LLP, JEREMY SHURE's practice focuses on representing emerging growth companies, as well as the venture capital firms that fund these companies. Jeremy is also an active mentor to TechStars and their "powered by" accelerators, and previously founded and managed a venture capital and consulting firm in New York City. @JeremyShure