I get this question all the time (in one form or another): “Hey Scott, can I raise money for my startup via Twitter? I have a lot of followers, and I know some of them would be interested in investing.” As discussed below, the answer is no — unless the tweet is a direct message (a “DM”) to a follower with whom you have a substantive, pre-existing relationship.
Under the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D promulgated thereunder, a startup (or any person acting on its behalf) is generally prohibited from any form of “general solicitation” in connection with the offer or sale of securities. Most States (including California) have similar laws, subject to limited exceptions.
The term “general solicitation” is not defined in the Securities Act, but has been broadly construed in SEC no-action letters to include any solicitations via mail, e-mail or other electronic transmission, unless there is a substantive, pre-existing relationship between the startup (or a person acting on its behalf) and the prospective investor.
Indeed, that’s the critical issue: whether there is a substantive and pre-existing relationship in place with the person receiving the offer. Let’s break that down:
What Does “Substantive” Mean?. Under SEC no-action letters, a relationship is substantive if the startup (or a person acting on its behalf) has reliable knowledge or information regarding the prospective investor such that it can evaluate the investor’s financial circumstances and sophistication. In other words, the nature and quality of the relationship must be such that the startup (or a person acting on its behalf) can determine that the person receiving the offer would be a suitable investor.
What Does “Pre-Existing” Mean?. Under SEC no-action letters, to be “pre-existing,” the relationship must be in place prior to the offer.
What Is an “Offer”?. Under Section 2(a)(3) of the Securities Act, the term “offer” is broadly defined to include “every attempt or offer to dispose of . . . a security or interest in a security for value.” The SEC has actually expanded the definition in regulatory proceedings to include press releases.
Based on the foregoing, it is clear that if a startup (or a person acting on its behalf) tries to raise money via a tweet to all of its followers (as opposed to a DM), it will in all likelihood constitute a “general solicitation” in violation of applicable securities laws. Not only is it extremely unlikely that there will be a substantive relationship with each of the followers, but also the retweeting of any offer will raise significant issues. Moreover, since a tweet is available for public viewing via the Web, it could constitute an “advertisement,” which is also generally prohibited under applicable securities laws.
The securities laws are complex and are a potential minefield for the unwary. While new technologies and social networks may make raising capital easier, the securities laws still prohibit certain activities in order to protect unsophisticated investors. Indeed, in light of the Bernie Madoff affair and other external pressures, the Securities and Exchange Commission and State securities law commissions are significantly stepping-up enforcement of such laws. Entrepreneurs thus must be careful and should seek advice from experienced counsel prior to any capital-raising activity, including via Twitter.