HALOS ACT: Will Congress Give the Green Light to Investment Pitches at Startup Demo Days?
Presentations made at startup demo days on college campuses and at accelerator pitch events routinely mention the details of a company’s effort to raise capital through the private sale of securities. This practice, however, raises concerns over whether these presentations amount to a ‘general solicitation’ for a company’s securities under Regulation D of the Securities Act. The definition of a general solicitation could include any advertisement, article, or other communication, including any meeting where the attendees were invited by a general advertisement that present the opportunity to participate in a company’s securities offering. If an early stage company makes a general solicitation, then it may be precluded from using certain valuable exemptions from registering their security offering with the SEC.
Companies that make private offerings of exempt securities typically rely on either Rule 506(b) or Rule 506(c). Rule 506(c) allows the issuer of a security to market its offering through general solicitations if the company has taken reasonable steps to confirm that all of the investors are accredited. Conversely, Rule 506(b) prohibits the company from making any general solicitations. However, the company is relieved from the obligation of having to confirm the accredited status of its investors and may rely on an investor’s self-certification under Rule 506(b). Therefore, a startup claiming an exemption under Rule 506(b) should be aware that making a general solicitation may potentially violate the conditions of its exemption.
Congress’ Answer to the Reality of Pitch Events
On January 10, the House of Representatives passed H.R. 79, the Helping Angels Lead Our Startups Act, or HALOS Act, that would amend Regulation D to make it easier for startups to participate in pitch events without fear of inadvertently making a general solicitation. The HALOS Act would provide an exception to Rule 506(b)’s prohibition against general solicitations for certain events sponsored by angel investor groups, venture capital associations, colleges and universities, and non-profit organizations. This means that a founder could preserve her exemption under Rule 506(b) and pitch the business to potential investors at these covered events.
Although the HALOS Act would remove the general solicitation prohibition for covered events, it limits the statements that a company can make about its securities offerings. The Act permits a company to communicate to event attendees:
- That they are in the process of offering, or will be offering, securities;
- The type and amount of those securities being offered;
- The amount of securities that have already been subscribed for; and
- How the company intends to utilize the proceeds from the offering.
The sponsors of an event, however, may not make any investment recommendations, nor charge for event attendance, nor receive any compensation with respect to the event.
Why the HALOS Act Matters
Startups that offer securities under Rule 506(b), of course, already routinely make pitches, that include details about their financing efforts, often without consequence. Nevertheless, this amendment to Regulation D would provide validity to an already common practice, and it would protect against any change in enforcement in the future. The Act would also be an important development for investors because it would provide better assurance that the companies they invest in have not inadvertently violated the general solicitation prohibition under Rule 506(b).
The HALOS Act would not affect the requirements for the actual purchase and sale of securities under Regulation D. This includes the accredited investor requirement. Nevertheless, it would help small businesses and startups demonstrate their innovations to potential investors capable of providing necessary early-stage capital without the fear of violating securities laws before their project ever gets started.
The bill was referred to the Senate Committee on Banking, Housing and Urban Affairs. The House passed a similar bill last session of Congress, but it ultimately died in the Senate. The most recent rendition of the HALOS Act has generated broad bi-partisan support with 344 yeas to 73 nays in the House. The Angel Capital Association has also endorsed it.