Pitch Events, Demo Days, and Securities Law Implications
When trying to raise money for a startup, it’s not uncommon for founders to participate in pitch events or demo days. Many of the top accelerators in the Nation have such events, and due to the current popularity of entrepreneurship and venture capital, I have noticed a lot of these events popping up all over the place. While pitch events and demo days are useful in helping startups get in front of potential investors, not all of these events, or what is presented on stage comply with relevant securities laws and could limit the offering strategy of a startup. The purpose of this post is to highlight these events, and the securities law concerns associated with them. Hopefully this will make you more aware of what you are getting into should your startup participate in such an event.
What are pitch events and demo days?
Pitch events are events at which startups talk about their company broadly, and specifically mention a proposed or ongoing capital raising round.
Demo days are events at which startups predominantly talk about their products or services. Typically, there is no explicit expectation that the startups are actively looking for financing or will discuss any proposed or ongoing capital raising round.
Securities Law Implications
The most popular exemptions used for selling securities to investors is under Regulation D of Section4(a)(2) of the Securities Act of 1933. Under these exemptions, there is Rule 502(c). This rule bans offering securities at any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
During a pitch event, a startup might be expected to talk about a proposed offering. Doing so would count as an offer of securities under securities law. Therefore, if a pitch event is announced in the media or on the unrestricted internet, generally a startup could not participate consistent with the ban on general solicitation. However, there may be some unlikely circumstances in which a pitch event is specifically designed to be consistent with the ban on general solicitation. Recent SEC guidance clarified that a presentation involving offers of securities at a pitch event may not violate the general solicitation ban if the event is structured to include only attendees with whom the startup or organizers have a preexisting relationship, or that have been contacted through an informal investor network.
During a demo day, the focus is on a startup’s products or services and not on their securities offerings. If your startup is participating in a demo day, you might not violate the general solicitation ban if you only talk about your products or services. However, the definition of offer under the securities law is broad, and product advertising and other seemingly non-offering related announcements can be deemed an offer of securities.
Best Course of Action
If you are participating in a pitch even or demo day, your best course of action is to ask the organizers of the event who the expected attendees will be, and how the event is being advertised. If you participate in a pitch event that is publicly advertised or make an offer of securities in a demo day, you will need to consult with your attorney on the best exempt offering strategy to pursue. Usually this is a Rule 506(c) offering that allows for the general solicitation and advertising of securities to accredited investors only. Finally, if you or your attorney have concerns about how the pitch event is being advertised or if anything you plan to say in a demo day could be construed as an offer, then it is probably best to skip that particular event.