You have a great idea for a new business – it is a fantastic new restaurant concept that incorporates some of the hottest trends in the industry, with a new twist that is uniquely your own. You put together a business plan, determine how much money you will need to get it off the ground, and then prepare a deck of slides for potential investors. Then you log into Facebook and post the news of your exciting new venture and tell all your “friends” that they should contact you if they are interested in investing.
Guess what? You likely have just engaged in what the Securities and Exchange Commission deems a “general solicitation” for investment. What does that mean? You have inadvertently significantly restricted the pool of investors who will be eligible to invest in your restaurant business. Whoops.
To understand why this is, you must understand the concept of “accredited” versus “non-accredited” investors, and also understand the role the SEC assumes in protecting the latter in particular from dubious or even fraudulent investment schemes. Put in simple terms, an “accredited” investor is someone with a high income and/or net worth and who, according to the SEC, is sophisticated enough to make wise investment decisions, or at least wealthy enough to not be ruined by an unwise one. Because of this purported sophistication and wherewithal, accredited investors are permitted to invest in business ventures that non-accredited investors are not.
Among those ventures are those with investment offerings that the proponents of the business have advertised to the general public. This is known as a “general solicitation.” If the business proponent wants to engage in such general solicitation, and also not have to register their securities formally with the SEC, they may only accept investment from accredited investors. Non-accredited investors will be completely shut out and barred from investing. So that Facebook post, which is probably intended to reach old friends, associates, or college buddies who would enjoy investing and supporting you in your venture, could have the unintended consequence of making it impossible for those precise people to actually invest – unless they also happen to be wealthy.
So, you ask, why is a Facebook post considered a general solicitation? Aren’t I just making it known to my friends and family? Well, while the answer is not as clear as we may like, the SEC seems to understand that what Facebook considers our “friends” and LinkedIn considers our “contacts” is significantly broader than the traditional meanings of those terms. Indeed, the SEC agrees that a communication made only to those people with whom we have a preexisting relationship would not constitute a general solicitation. Rather, it is only when the communication gets made in a manner that the target audience is not specifically limited and controlled that it rises to a general solicitation. In most instances, however, given the nature of social media and the inherent inability of users to strictly limit who sees their posts, the default position is likely to be that a social media post inviting investment in your startup will be deemed a direct solicitation.
So think hard before you hit “post” or “publish” on that Facebook posting. (Which, come to think of it, is actually a pretty good policy in general.)