Earlier this week, I wrote that venture capitalists should take advantage of new general solicitation rules that allow them to advertise when they’re in fundraising mode. I was expecting pushback from skeptical VCs; what I heard from them instead was confusion about how they could advertise without breaking the rules.
For help, I phoned Jay Gould, a partner at Pillsbury Winthrop Shaw Pittman who heads up the law firm’s investment funds practice. Gould — who’s in regular communication with the SEC and says those proposed amendments around the new rules will likely be “substantially” adopted — agreed to discuss the pros and cons for VCs interested in advertising.
According to Gould, one of the biggest downsides of advertising is “potentially” drawing more scrutiny from regulators and investors. (It’s already VCs’ biggest fear, seemingly.)
There’s also just a lot more paperwork. First, a firm will have to file a Form D at least 15 days before beginning its general solicitation for the offering. It will then have to elaborate on whatever advertising methods it plans to use. And it will need to file offering materials, like PPMs, with the SEC before it starts handing them out to investors. Not last, a follow-on form has to be filed once the offering is closed.
The solicitation period can also be a little labor intensive, particularly if it drags on and the firm’s performance changes during that time. The reason, says Gould, is Rule 156 of the Securities Act, which states that funds can’t represent information is any way that’s misleading or causes “material” confusion to investors. That means if an existing investment goes south during the marketing of a new fund, the firm needs to alter its advertising to reflect that change in its overall performance to stay in the good graces of the SEC. (Gould says firms should do this “promptly,” and suggests that even minor changes in performance could necessitate these updates.)
What if a venture firm embarks on a public offering, then decides to shifts gears to raise the rest of a new fund privately? It’s not something Gould recommends. Among other challenges: after a public offering closes, a firm has to wait another six months before launching a private offering. (It’s a rule meant to keep the offerings from becoming integrated.)
So what are the advantages for firms interested in availing themselves of the new rules, I ask Gould. He’s quick to point out that the funds that embrace them can post their performance numbers on their Websites, or go on television and talk about their funds without “getting grilled by compliance people.” Both could be effective in bolstering a firm’s brand and making it faster to raise a fund.
In fact, he says, Pillsbury already has “a couple” of fund clients that intend to pursue general solicitation. And he anticipates many more to come — even if it takes a couple of years for firms to grow comfortable with the prospect.
Most venture firms still “view these new rules somewhat suspiciously,” Gould notes. “But someone will do it right,” he says. “And it will be a really professional, polished effort. And people will go, ‘Holy shit. That’s the new standard. I guess I have to do this now.'”
Photo courtesy of Pillsbury Winthrop Shaw Pittman LLP.