If you are raising capital for your startup business through some sort of securities offering (i.e. selling stock, LLC units, notes, bonds…etc…to investors), hopefully you have sought the advice of a good lawyer. And hopefully the first thing that lawyer did was grab your ear and explain to you the concept of “general solicitation.” And hopefully then that lawyer explained to you that if you generally solicit potential investors, you run the risk of getting smacked silly by the SEC and state securities regulators – especially if those solicitations turn into actual sales of securities.
In general, the rule against general solicitation means that you cannot advertise, engage in a mass mailing, or issue a press release that discusses the existence of your offering / potential offering of securities. A conservative interpretation of the SEC’s view is that all potential investors should be people with whom a company, its directors, officers, or full-time employees have a pre-existing business relationship. If you want to generally solicit, you need to register your securities with the SEC, which means big bucks in legal and underwriting fees (e.g. and IPO).
Now you can officially add social media to the list of no-no’s (which should have been quite obvious anyways).
Yesterday the SEC announced a settlement with two advertising executives who launched a Twitter and Facebook campaign to buy the Pabst Brewing Company, makers of the questionably classic beer Pabst Blue Ribbon. They also created a website that is no longer around – BuyaBeerCompany.com (yes!). Their stated goal was to raise $300 million to buy Pabst. So they started taking pledges, and apparently received around $15 million in pledges within a few weeks – and the full $200 million from 5 million pledgers within 5 months (wow!). Of course this attracted media attention, which alerted the SEC to the campaign, and of course the SEC got all hot and bothered. This was clearly a general solicitation, and the SEC was having none of it. In the end, the two never received the $300 million in pledges, and never collected any money. The SEC issued an order finding that these two knuckleheads violated federal securities law. As a result, they must cease and desist from committing or causing any violations and from committing or causing any future violations federal securities law – which the knuckleheads consented to without admitting any wrongdoing.
This was more about setting an example than actually dishing out punishment (they got slapped on the wrist). The clear message is that if you start tweeting to the masses that you are raising money, be prepared to get an SEC boot planted in your rear. Luckily for these guys they never actually collected any money, and more importantly, never lost any money they may have collected – because then this would have been about punishment – and the penalties can be quite severe.
I am not always a huge fan of our securities regulatory scheme – sometimes it makes it very difficult and expensive for a startup with little capital to raise the capital it needs to get off the ground or expand. And this is coming from someone who makes a decent living advising business owners who are raising capital. Still, there is a reason these laws and regulations are in place (scam artists lurking EVERYWHERE). So if you are raising capital, be careful, and get some good advice. And stay off the twitter. And the facebook. And don’t launch a website called “PleaseInvestInMyCompany.com” (I already own that domain name anyways).