What Happens to Demo Days in the New Era of General Solicitation?

With the advent of general solicitation in Rule 506(c), many have been asking what will become of “demo days” or “pitch-a-thons” — events where groups of startups get up on stage and present their product/business to a group of people (that often include a number of angel/VC investors), sometimes with a panel of experts on startups critiquing the pitch or the business. General solicitation as the SEC defines it appears to include events such as these, but if demo days are *now* legal, what were they before? The general consensus in the legal community is that demo days are a form of general solicitation, and that prior to the adoption of Rule 506(c), their existence was a matter of the SEC choosing not to enforce the law against participants. When asked whether demo days met the definition of general solicitation in a recent roundtable, SEC staffers could only give a “we don’t know” answer. The issue is that if startups participate in demo days, and demo days qualify as general solicitation, do startups become locked into a 506(c) offering? Remember that once a company begins a Rule 506(c) offering, they cannot go back to a Rule 506(b) offering (the old Rule 506 method). Moreover, if the startup is already in the midst of a Rule 506(b) offering and participates in a demo day, the Rule 506(c) offering ‘initiated’ by participating in the demo day may be integrated into the ongoing Rule 506(b) offering (turning it into a (c) offering), and requiring the company to adhere to Rule 506(c)’s more stringent requirements. Several demo day programs have been trying to modify their policies to help startups avoid making a general solicitation. Some are having startups remove their ‘ask’ slides from their pitch decks, so that the companies make no mention of needing or soliciting investment (although the obvious implication is otherwise, but startups and audience members can make individual connections and offers later); other demo days are restricting audiences to specifically invited persons or requiring that audience members have a pre-existing relationship with the program or with the presenting startups. It is not clear whether such methods would be sufficient to make demo days not a form of general solicitation (if they are at all). If startups do decide to participate in such events, they should consult with their legal counsel and weigh the risk of potentially being locked into a Rule 506(c) offering with its increased restrictions and responsibilities.

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