Program to target rules for funding startups

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During Alpha Lab's most recent Demo Day and Technology Preview, sales pitches made by the class of startups lacked an essential element: the sale.

Elijah Mayfield, founder of teaching software company LightSide Labs, asked the crowd of nearly 400 for connections to teachers rather than for a lump sum to start his business. Josh Lucas, who created the crowdfunding startup Crowdasaurus, asked guests to meet him at his table after the pitches to discuss ideas.

Innovation Works president Rich Lunak set the tone for the day with an introduction that made it clear to guests that the presentations they were about to hear were informational, not commercial. "This is not meant to be a general solicitation of funds," he said.

Mr. Lunak's carefully chosen phrase reflects only one adjustment that entrepreneurs and investors have been making due to recent amendments of the federal Jumpstart Our Businesses Act.

The 2012 act allowing businesses selling equity to publicly advertise went into effect in September, but confusion surrounding what constitutes a "qualified investor" and how to legally pitch to large audiences has many entrepreneurs questioning their next fundraising steps.

Hoping to address the confusion, Innovation Works will host a panel discussion on Tuesday titled "Fundraising and the Jobs Act: New Rules About Raising Capital for Investors and Entrepreneurs." The discussion at the University Club in Oakland will feature five panelists from the legal and investment community who will break down the law's nuances and explain some of the basic requirements that companies raising funds are now expected to follow.

"It's important to have an informed discussion around the new responsibilities and how they affect some of the area's stakeholders," Mr. Lunak said.

Changes to the rules surrounding general solicitation -- a company's public declaration that it is raising funds or selling equity -- will undoubtedly be a hot topic, said Kimberly A. Taylor, partner with the Downtown office of Morgan Lewis & Bockius LLP, who will be a panelist.

In addition to opening the door for advertising public offerings, Ms. Taylor said, new general solicitation rules also allow companies to file confidential IPOs, allowing them to test whether certain types of investors will be receptive.

However, the new guidelines also require companies to make official filings with the Securities and Exchange Commission 15 days before and after engaging in general solicitation.

With many entrepreneurs used to selling the assets of their business during casual, impromptu conversations, Ms. Taylor said, they'll have to walk a thin line around the new rules.

"While there is additional flexibility created by the Jobs Act, it's important to discuss fundraising strategies to make sure it's in compliance," she said.

Another change that comes with allowing general solicitations are new guidelines requiring companies to verify that any potential investors meet certain guidelines regarding income and net worth, said David S. Smith of the Pittsburgh office of Pepper Hamilton LLP.

The idea, he said, is to ensure that investors are financially prepared to take the impact of losses that could come with investments. The verifications will be particularly important if a proposed rule change allowing startups to sell equity through crowdfunding goes through. The proposed change is undergoing a comment period with the SEC that will last until Feb. 13.

No matter what direction companies ultimately decide to take with fundraising, Ms. Taylor said, they should consult an expert before making any moves.

"In this environment, it's important for startups to speak with counsel to make sure they are following fundraising requirements of the Jobs Act and new regulations that have been put in place," she said.

Deborah M. Todd: dtodd@post-gazette.com or 412-263-1652.


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