SocialMedian founder Jason Goldberg wrote a Twitter message moments ago letting people know that they are raising a new round of funding, up to $500k, and to contact him if you’re interested. Great way to get investors, right? Exactly not – the whole purpose of the Securities Act of 1933 is to prohibit public offerings like these unless accompanied by a registration statement and a valid prospectus approved by the Securities and Exchange Commission (the fun stuff is in Section 5). The Twitter also violates various state laws.
The good news – enforcement is unlikely, my lawyer tells me. But investors who find out down the road that they’ve lost money are in for a treat – they could almost certainly rely on the offering to get their money back via a rescission right. Of course, by the time they realize they want their money back there may not be any money left to get.
Most venture financings are excluded from Securities Act registration via a private offering exemption. But the key to these exemptions are that they aren’t disclosed publicly and the investors must all be high net worth individuals.
In other words, this is exactly the kind of offering the law is designed to stop in order to protect individuals. I wonder how long the Twitter will be left up.
Update: the message has been removed. A new message says “Deleted the tweet regarding investment. Wasn’t worth the techrunch headache.” Sorry Jason, didn’t mean to rain all over your parade.
You’d think they’d at least have one financial guy at the company who would know this is illegal.
they’d have*
Err, scratch that.
I think you’ve had too much coffee Will
no such thing as too much coffeee!!!!
Quick note that it should probably be “high net worth” not “high net work”
um doesn’t the SEC only deal with public companies?
Actually, no. Also, in many ways Social Median just because a public company. They just aren’t complying with the disclosure and registration statement requirements.
The SEC has further reach than one might think. For example, even if you get a registration exemption from the SEC, you are still held to fraud standards.
Question for MA: There is the Stanford Encyclopedia of Philosophy, which is an excellent resource. Do you know of any similar, high-caliber resources for learning more about law?
yes. law school. and my lawyer.
Haha – funny. If you want to learn about law, you should definitly avoid the law school – although it is your necessary entry-ticket in order to learn about law in the industry
Haha, well, I have no interest in going to law school. I thought you might be able to recommend an online source to gain a little knowledge on the side, as I finish my degree in engineering.
Julian – does this help? http://topics.l...u/wex/Main_Page
Paul, thanks man! That looks pretty good, I will have to bookmark it.
I know a good book. It’s a text book for law students, but if you stop after reading first two chapters you will learn a lot and escape relatively unharmed by the rest of it.
Corporations: Examples And Explanations (Examples & Explanations) by Alan R. Palmiter
Make sure to get the fifth edition, not the fourth.
Julian,
A very good place to learn more is NoloPress.com
It sure as heck is a great publicity stunt!
I didn’t even know what socialmedian was and now they’re on TechCrunch as the first company to try to sell stock via Twitter!
Awesome move by them. It’ll be more awesome though if they can actually land the money! hahaha…guess we’ll see
That’s what I think myself: amazing publicity for just one attempt to violate an act? Very clever idea, I really hope it was a deliberate move.
I wish I have got $ 25k
Doesn’t look like they care if an investor is an accredited angel or not. This is not going to end well.
Michael I would totally agree with all your comments but wondering where things like Twitter come into a tombstone offering on reg D 504 type offerings for scor offerings (small startups) that can’t get traditional funding?
So basically, what and how social media will or can help the startup legally?
Things are a changing!
kindest regards from Vancity
Caveat emptor, Michael.
Of course we care if the investor is an accredited investor or not. We have strict requirements for investment. All of our current investors and all investors in this round would be required to be qualified investors. The twitter message was intended to let my twitter network know that we are going to be bringing in some more angel investments. All potential investors would have to pass the standard suitability test for such an early-stage investment.
Hey Jason, it’s the offering itself that is a securities violation.
In terms of “public disclosure”, what exactly makes this different than the articles such as “Docstoc Says Big Round Of Funding Coming” from 8/3/2007 ? I’m not seeing the distinction between announcing it yourself vs announcing it to a journalist that then writes about it.
you can’t really announce any sec-regulated news over twitter, the required boilerplate alone (not an offering, contains forward-looking, potential risk, etc…) is way more than 140 characters!
So why remove the tweet?
I’m a securities licensing teacher with Greico Financial Training, and this is to me is quite amusing. I’m definetley be using this story when teaching regulation D issues in class.
- Alex Merced
You’re a teacher and you write “definetley”?
And “…is to me is…”?
Teachers mistype too, cut him a break.
“Those who can’t, teach”
Those who quote, “Those who can’t, teach” can’t do or teach, and are left to quote at the doers and teachers.
hey guys…
umm no. from a legal standpoint, regarding securities actions. things aren’t changing. you may not know the legal intricacies, you may know them, and don’t give a damn. but let the lawsuits start when you’re either reported, or when someone sues you, and you have the SEC down your back.
On the other hand, I’d be willing to bet that a good deal of serious investors (angel, or otherwise) aren’t going to want to touch anything associated with this guy, given the grade school stunt that this is. this seems to imply a complete f* up regarding even basic business law/ethics/approach…
so, if you can’t get this kind of stuff straight, how the hell are you going to pull together a decent plan to actually make/generate revenue…
peace…
Hey stupid,
The SEC was created in the early 1900’s. It wasn’t suppose to be around for long but the government wanted to control more of how you use or invest your money by keeping them around.
They claim to say it protects small time investors and allow anyone who is rich to squander away their money at will. This is horsesheet. The government thinks it knows best. Why not just become communism and hand all the money to the government and let them fairly distribute the capital. It’s funny how a few noisy people talk like they know the SEC laws and say “ooooh they break the law”.
What about the current system makes you think the government doesn’t already hava a big hand in picking winners and losers.
As far as the securities offering goes, it’s illegal, end of story. Until the laws are changed it’s just the way it is. Any good lawyer will tell you to be extremely cautious as to who you solicit for investments.
You’re both fairly retarded.
The SEC doesn’t care about protecting individuals. It’s goal is to promote full and fair disclosure so that investors can make a fully informed decision when deciding whether to invest.
The purpose of regulating securities offerings is to force companies to fully disclose information that nobody in their right mind would otherwise disclose, but which an investor would consider materially important in his decision (not) to invest.
Nice to see the happy, loving atmosphere of TechDirt permeating TC
Looks like the Twitter post has been deleted.
Deleted the tweet. Wasn’t worth the headache. Was only intending to let my followers know. Back to work.
Summize doesn’t forget though – http://search.t...lmedian+raising
Why is Jason such a magnet for bad press?
Meanwhile, the post has spurred an interesting discussion around VC micro-finance on friendfeed. http://friendfe...1b-26d458e92e7f
I’m confused why this is a problem, would it also be illegal if I said my company was looking for investments in this techcrunch comment?
Is it that he mentioned specific amounts in his message? Would the following message also be illegal?
‘We are looking for angel investment, please contact me directly’
Soliciting investments publicly, unless you conform to very specific rules, is illegal.
Yes, that message would be illegal.
One of the downsides of unfiltered communications. “There’s a sucker born every minute,” P.T. Barnum.
@dMix perhaps because I am actively personally engaged in social media vs. the typical startup CEO who is not. I am part of the discussion and I try things and sometimes people like that and sometimes they don’t.
I certainly learned from a bunch of mistakes I made at my first startup.
I took it on the chin on this one and prob deserve it. I served it up to Mike and he smartly hit me for it.
Live and learn I say and try again.
hey, we measure PR by the pound. It’s all good.
The guy made a mistake; rather than shoot him a quick heads-up email, you hung him out to dry.
I’ll also note that I decided to just take down the tweet vs. arguing the law with Michael, or debating whether this was a solicitation or not, etc. Not worth it. back to work …
only person you have to convince is your lawyer. And the SEC.
It seems to me like this isn’t an official “public offering” but an announcement of a “direct or private placement”. Solicitation of sale of privately owned stock directly to less than 35 buyers is left unregulated by the SEC. Judging by the announcement, it’s mathematically impossible to sell to more than 35 buyers, so it just looks like announcement to me. Additionally as stated above they are looking for qualified institutional investors only, so this doesn’t appear to violate any laws.
except for the 33 Act.
I guess general solicitation isn’t allowed even under the exemptions in the securities act of 1933
the 33 Act requires that private placement offerings be limited to private communications, so a general announcement like this destroys the exemption.
This is a 10x a day occurrence on LinkedIn Answers – http://tinyurl.com/5jfpd9
LinkedIn Answers is something I’ve spent time on and tried to contribute to but the “questions” and self-policing of the community for these kinds of things is pathetic.
I hang out in Telecommunications and there are pitches masquerading (and sometimes just flat out spam) there all the time.
http://www.link...ons/TCH_ITS_TCI
There are numerous cases of schemes where shills collapse down on questions as well. My favorite so far was a guy that requested that LinkedIn delete my response to a question when I had the audacity to recommended a competitive solution to the company that he was pumping on replies back via private messages.
[/end LinkedIn Q&A rant]
By “back to work” he seems to mean “Refresh, refresh, refresh…”
In the 1920’s there were hundreds of completely fake companies that had stock offerings and the bagholders got fleeced in the crash. Thus all these laws.
Nowadays you gotta have a ’software company’ that ’scales well’ (So its a real company, it exists on paper AND on the computer!) Then you can fleece investors legally. viva web 2.0!
How can a site like this ask for funding? It’s not even innovative in any way.
Umm…is it 1993? I think you mean “75 years of securities regulation”
Also, what constitutes an offering? As someone else above said, is it just because he stated a number? What if you had covered social median on TC and based on what they told you, included something like “the company is seeking additional investments from angels.” Would that be considered disclosure?
What if he had just said something like “I would sure love some more angel investment in my new company.” Does that count?
And more importantly, where can we find stuff like this out, assuming we don’t all have an attorney on retainer
@Ryan Waggoner-A great place to start is the SEC’s website. They have a good FAQ section for small businesses: “http://www.sec.gov/info/smallbus/qasbsec.htm”
Sweet! I’ll check it out.
1) An offering is any offer or promise to offer, or anything remotely construable as an offer, to buy or sell securities in a company.
2) It is not just because he stated a number. The number is irrelevant to whether it’s an offer or not.
3) Full disclosure is required unless the offering is exempt. This means: all risk factors, company financials, specifics of the offer, etc. Their are exemptions for newspaper announcements (and the like) which don’t require full disclosure as long as the announcement merely announces that securities are for sale, and provides a link/address where full disclosure documents are provided/can be requested.
4) “Loving the angels” is a violation of the SEC offering guidelines because (assuming that the twit would otherwise have qualified for the newspaper announcement exemption) this destroys the newspaper anouncement exemption.
5) I recommend Securities:Explanations and Examples, which is a study aide commonly used by law students.
maybe the 1933 law needs to be updated?
It has been. Many times.
How is this site any different than Digg? Seems like a clone to me.
User-moderated categories, for one thing. Digg’s “technology” page is just too broad to read.
SocialMedian will fail just like Jobster, because it’s a me-too play and not a very good one at that.
@Andrew — ah, now there’s a topic I’m very happy to discuss.
Some have started to refer to socialmedian as a sort of Digg meets the social graph. It’s social news inspired by people who share your interests.
Our intent is to be a next evolution of social news, focused around delivering personally relevant information. In that way, socialmedian is more about “me” vs. the 1st crop of social news sites which were mostly about “we.” The idea is that each of us have our own “information DNA” (e.g. mine is politics, startups, tuscany travel, New York restaurants, modern interior design, etc.), and that for the specific topics we are about there are other people out there who can help inform our information discovery and consumption. Those might be people I know (my real world social network), people I am connected to online (my social graph), or people I should know (e.g. other people who have my same job title, or who just are effective within a specific topic). The results — if done right — is a personalized stream of news, influenced by people who share my specific topical interests.
So, at a high level, the problem we are really trying to solve at socialmedian is around information overload. We observed that the recent technological advances that had made content creation faster, easier and cheaper than ever (all positives), had also resulted in a low signal-to-noise ratio (negative), and that consumers often struggled to wade through all that noise and get to the most personally relevant information. This is an interesting problem to tackle because on the one hand the consumer theoretically wants access to everything, yet (as is typically the case) the consumer also wants to do as little work as possible to hone in on just the info they really need. It’s almost like the consumer wants the comfort of feeling like the volume is all the way up – i.e. they are searching exhaustively – while at the same time they want a system smart enough to turn the volume way down to their personal interests.
From that problem we came up with a theory on how to solve it. Our hunch was that people who share topical interests could help filter information for each other at the topical level. The idea was that whether you’re interested in a specific topic like iphone, campaign 2008, online marketing, SEO, the Olympics, Tuscany travel, Spanish wines, or raising twins, etc., there are other people out there who share your topical interests and that collectively you could highlight and filter to each other what is worth checking out on a given day. That’s not all that dissimilar to what editors at publications have been doing for their readers for years, except that our model would enable citizens anywhere to do that for each other. We also envisioned a new sort of “editor” evolving through our service, “newsmakers,” who would highlight and lead discussions on topics of interest with their followers or readers.
We just got started on socialmedian 6 months ago and just went beta 2 weeks ago. So, it’s early and is yet to be proven out. So far though our user engagement levels are very high and we’re shipping new features every other day while we try to keep up with user requests.
Jason, I’ve been thinking about this problem for a few years now. I think you’re relying too much on the social dimension. You need to automate. With $100K and 6months, I can build a product that will dwarf your site.
Oh, and while we’re at it. Here’s a longer post on my perspective on the 2nd time around as a founder of a startup company. http://blog.soc...d_stint_as.html
Jason, had you not put 25k, 100k or 500k it probably would have been legal. You CAN say that your company is looking for investment money.
You can not publicly sell stock off an exchange.
That was your only error.
Here, I’ll prove it.
“My company is looking for investments from qualified private individuals and corporations through their representation. Please contact me directly or through representation if you are interested” – Chris Orjii LLC
“We are also looking for new trade partners with DUNS registrations to raise our business credit. Please contact me if you would like to have us build you custom business software” – Chris Orjii LLC
https://smallbu...&cm_mmc=dnb*home*gws*lookup
That should be fine, because I have not specified a price of investment and am not directly soliciting the public.
Jason, had you not put 25k, 100k or 500k it probably would have been legal. You CAN say that your company is looking for investment money.
You can not publicly sell stock off an exchange.
That was your only error.
Here, I’ll prove it.
“My company is looking for investments from qualified private individuals and corporations through their representation. Please contact me directly or through representation if you are interested” – Chris Orj11 LLC
“We are also looking for new trade partners with DUNS registrations to raise our business credit. Please contact me if you would like to have us build you custom business software” – Chris Orj11 LLC
https://smallbu...&cm_mmc=dnb*home*gws*lookup
That should be fine, because I have not specified a price of investment and am not directly soliciting the public.
Not sure anyone should be taking legal advice from Chris, TechCrunch’s resident troll.
Ah, but you are soliciting the public. You’re saying “looking for investments”, and you’re not specifying *specific and particular* individuals. You’re addressing the general public. That you then limit the offering to qualified individuals is immaterial; private placements may only be offered to specific people.
The numbers don’t matter.
You are partially correct, though. Assuming you don’t want a private placement exemption, the twit “offer” would otherwise be exempt where:
- You only announce that you’re looking for investors or are offering shares.
- You MUST provide a URL or mailing address at which full disclosure can be found.
- You say nothing else. Offering even the slightest bit of additional information triggers full disclosure requirements for the announcement (to avoid selective disclosure).
And I digress. Back to work…
I’m no attorney, and I agree with a lot of the comments on this thread that suggest this was a rookie move on Jason’s part. But….
It seems to me that Jason can claim his actions were done under the context of a Reg A, “test the waters” action…
From the SEC: (http://www.sec....asbsec.htm#eod6)
Regulation A
Section 3(b) of the Securities Act authorizes the SEC to exempt from registration small securities offerings. By this authority, we created Regulation A, an exemption for public offerings not exceeding $5 million in any 12-month period. If you choose to rely on this exemption, your company must file an offering statement, consisting of a notification, offering circular, and exhibits, with the SEC for review.
Regulation A offerings share many characteristics with registered offerings. For example, you must provide purchasers with an offering circular that is similar in content to a prospectus. Like registered offerings, the securities can be offered publicly and are not “restricted,” meaning they are freely tradeable in the secondary market after the offering. The principal advantages of Regulation A offerings, as opposed to full registration, are:
* The financial statements are simpler and don’t need to be audited;
* There are no Exchange Act reporting obligations after the offering unless the company has more than $10 million in total assets and more than 500 shareholders;
* Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document; and
* You may “test the waters” to determine if there is adequate interest in your securities before going through the expense of filing with the SEC.
If you “test the waters,” you can use general solicitation and advertising prior to filing an offering statement with the SEC, giving you the advantage of determining whether there is enough market interest in your securities before you incur the full range of legal, accounting, and other costs associated with filing an offering statement. You may not, however, solicit or accept money until the SEC staff completes its review of the filed offering statement and you deliver prescribed offering materials to investors.
Almost. But not quite. Jason was soliciting money, so Reg A doesn’t apply. The twit was pretty clear about that. Which means he would have to use one of the other exemptions…which for reasons above, also don’t apply.
He can put his company on the pink sheet exchange and raise money that way. =)
“If you “test the waters,” you can use general solicitation and advertising prior to filing an offering statement with the SEC”
That’s what Google did with the dutch auction prior to their IPO.
One thing people in general should know is that no ordinary entrepreneur would get away with doing pre-IPO dutch auctions online or networked. Most of what these companies do, they do because they know that if it falls into question they have the resources to do it the other way.
I love that many commenters apparently believe that 15 minutes on google is a substitute for years of experience in practicing securities laws.
Take it from someone with that experience (and the many others who have said it before):
No matter what you found on google, what you read on linkedin, or what some other clown did before, what jason did violates a number of provisions of the securities laws and the regulations promulgated by the SEC.
He has since done the right thing (although the takedown tweet probably should have said “Thanks, Mike, for keeping my ass out of trouble”).
You should add: “no matter what some anonymous commenter named randomjohn tells you”
Seriously, thanks for the legal advice from all your years of experience, even though it’s utterly useless to all of us here.
He knows enough about securities laws to not give out specific securities law advice on the internet.
It’s not utterly useless. Hopefully it will serve as a point of caution that you should be contacting a lawyer early in the fund-raising process.
Why should anyone who is small care about the SEC? SEC is working on deal that makes them a lot more. Running a small startup that has no revenue and is raising public fund would do them little or nothing, and in fact costs them more money to prosecute. The only contention I see on this is that if the investors were asking for their money back AND they report to the SEC, otherwise, he can solicit offering as much as he wants until some oss hole SEC guy who wants to go strict by the law and shut him down. If that’s the case, he can be fined up to 3 times the stated fine for violation based on actual cost to investors.
And to the guy who said he has a lot of experience in this … go kiss a donkey because you’re having a hard time convincing startup to give you money through ur threat of violating SEC to make money. Lawyers are good at this. They will scare the general public into any violations to help their business.
I liked Jason’s post on his blog. It is really interesting and a good read. I think the tweet was more like an “invitation to offer” than an “offer.” Really not a big deal and probably will not be considered a violation of SEC regulations. Does SEC not have better things to do like go after the mortgage bandits and wall street firms.?
Also I am from Pune, India (his off-shore team location) and wish I could go there every month
Best of luck to Jason on SM.
No. They don’t, because the SEC’s primary job is precisely to govern crap like this under it’s mandate to promulgate full disclosure. Regulating the activity of the marketplace is only a secondary task, which is why the SEC only steps in when fraud or unfair practices (almost all of which can, and are, reducible to a form of fraud or deception) are involved.
SocialMedian.. what a crappy site. You can install Pligg/reddit and have the same thing.
IT’s not against the law if only high net worth individuals are allowed to participate.
Twitter should have a private tweet option for stuff like this where the tweet would not show up on your public timeline but would go out to your followers. I don’t know if it would get around the ‘33 act (is it still a public offering) even if it linked to a proper offering with all the disclosures. It would certainly limit the size of a PR/regulation clusterfuck like this, however.
Twitter does have a private tweet option. Go to Settings and click on Protect My Updates. This will cause your tweet not to show up on the Public Timeline.
this is funny that it is from Jason Goldberg…unless I am mistaken, he was banned from the Stanford GSB student email listserv back in 2000 for sending viral marketing solicitations to the list without disclosing his personal financial self-interest (anyone remember when Paypal was paying $5 for every new account you referred?)
hahaha. one of the funniest tc posts yet.
nobody, sorry you have the wrong somebody. that wasn’t me.
Arrington definitely wins for headline of the day.
While were on the topic of raising fund in a more open/public manner. Andrew Klein in his first startup Wit Brewery successfully pulled off raising capital via a public announcement on the web back in the mid 90’s. He did have issues with the SEC but ultimately addressed many of their concerns and was able to raise a few million for Wit Brewery (a microbrewery looking to expand beyond NYC- Tristate area). Ultimately he realized the power of community investing and transitioned his little microbrewery Wit into Wit Capital an investment bank.
Enough of the history lesson — the early vision of Andrew to enable community investing is still a long way from being fully realized. Why is that I can loan deadbeat $10K to repay their $40K in credit card debt via Prosper but I can’t directly and efficiently (i.e. no long lawyer documents, fees, etc.) invest $10K into a legitimate web startup or a local frozen Yogurt store looking to expand?