HALOS Act Provides Clarification on General Solicitation Under Federal Securities Laws
The long awaited “HALOS Act,” or Helping Angels Lead Our Startups Act, was passed by the United States House of Representatives (H.R. 4498) on April 27, 2016 to help clarify the rules on “general solicitation” under the federal securities laws. Importantly, the HALOS Act directs the Securities and Exchange Commission (SEC) to amend Regulation D within six months to make the prohibition against general solicitation inapplicable in certain circumstances. As described more fully below, the new law will permit startups to pitch their business in public without having to demonstrate that everyone in attendance is an “Accredited Investor” as defined in the securities laws. While the HALOS Act solidifies into law many issues that the SEC Staff has already addressed in the form of no-action letters and compliance and disclosure interpretations (e.g., on demo days), the HALOS Act provides additional guidance to the investor community, including to both issuers and investors.
Under the HALOS Act, the prohibition against general solicitation under Regulation D of the federal securities laws will not apply where a presentation or other communication is made by or on behalf of an issuer at an event sponsored by any of the following groups: (1) the United States, any territory or State (or political subdivision thereof) or government agency; (2) an institution of higher learning; (3) a nonprofit organization; (4) an angel investor group (as defined more fully below); (5) a venture forum or venture capital association or trade association; or (6) any other group or entity as determined by the SEC. Importantly, the parties involved must also abide by certain rules set forth in the HALOS Act and which will be further clarified by the SEC. For example, advertising for the event cannot reference any specific offering of securities by the issuer other than that the issuer is in the process of offering or planning to offer securities, the type and amount of securities being offered, the amount of securities being offered that have already been subscribed for and the intended use of proceeds of the offering. Additionally, the sponsor of an event may not: (1) make investment recommendations or provide investment advice to event attendees; (2) engage in an active role in any investment negotiations; (3) charge event attendees fees (other than administrative fees); and (4) receive any compensation in connection with the event that would require registration as a broker or dealer under the Securities Exchange Act of 1934 or as an investment advisor under the Investment Advisers Act of 1940.
Congress also provided guidance on the definition of “angel investor group” within the meaning of the new legislation. For an entity to qualify as an angel investor group under the HALOS Act, the entity must meet the following qualifications: the entity must be composed primarily of individual accredited investors who are interested in investing personal capital in early-stage companies; the entity must hold regular meetings and have defined procedures for making investment decisions, either individually or among the membership of the group as a whole; and the entity cannot be connected to broker-dealers or investment advisers.
We will continue to monitor the implications for both investors and issuers and the progression of the HALOS Act as it goes to the United States Senate for consideration. The full version of the HALOS Act passed by the US House of Representatives can be found here.
For more information, please contact Lori Smith (firstname.lastname@example.org; 212.714.3075), Ryan Udell (email@example.com; 215.864.7152), Bridget Henwood (firstname.lastname@example.org; 212.631.4421) or Michael Psathas (email@example.com; 212-868-4833).