Online Pitches: The Final Chapter ... Before the Flood Tide Rolls In

Joseph W. Bartlett, Special Counsel, McCarter & English LLP

Now that the JOBS Act Title II regulations are largely in force, hybrid private public offerings … PPOs (in my parlance) … are authorized and enabled, enabled meaning that emerging growth companies (defined as less than $1 billion in gross revenues and, therefore, just about every private company in existence) can pitch for accredited investors without regard to the ban on general solicitation … i.e., to mailing lists in the thousands; advertising in trade journals, social media; and on the worldwide web. The requirement that the issuer and its advisers have taken reasonable steps to verify [1] the financial status of accredited investors has been styled by the skeptics as a hurdle but there are multiple ways to surmount that requirement, including quite a simple maneuver in cases on which this note focuses (see below). And, there are service providers ready, willing and able, at reasonable costs in my view, to handle back office compliance chores for the issuer and the platforms or portals that make it a business of curating (another popular word for sifting, sorting and culling) deals and chaperoning the emerging growth companies (“EGCs”) to literally millions of potential investors.

There may be, however, a problem, referred to in various commentaries, including my published brainstorming exercises: [2] why bother to put a company up on the web courtesy of Rule 506(c) and spend money … i.e., any non trivial money plus time in preparing for the launch … if the odds of an EGC finding investors in sufficient number and of the appropriate quality to fill out the round fall in the neighborhood of 1 in 10? [3] While I don’t pretend to have conducted or been the beneficiary of a comprehensive statistical analysis, anecdotal evidence suggests that a 10% chance of closing the deal online is a realistic data point. It is early days, of course; but that number appears to be in the ballpark based on the first month or so of Rule 506(c). We will know a lot more when the remainder of the 506(c) Title II regulations are in force and we have both Advance Form D together with post- closing Form Ds … a methodology the SEC Staff has devised so that it can keep an eye on what is going on in aid of the overall objective Congressional mandate, i.e. to free up capital for small businesses.

Thus, my concern is not so much strangulation by regulation but the difficulty specific pitch materials have in rising above the clutter, absent a method for empowering EGCs to add distinguishing features in addition to the classic pitch propaganda – i.e., hockey stick forecasts and grandiose claims about the intellectual property and the size of the market, the latter claim grouped by old timers like myself in the ‘Chinese Finger Ring Fallacy’ bucket. [4]

My guesstimate/forecast focuses on the premium ways for the market to structure the pitch materials to attract, in specific cases, interest from investors who are not only rich, i.e., accredited, but also smart, meaning they understand the metrics of investing in early stage companies. They are smart enough to grasp the fact that investors who have made serious money in the venture capital sector, up until recently at any rate, are largely in that select 1% (considerably less than 1%) of the investment community favored with invitations to invest as limited partners in well-staffed and managed venture capital funds. I have made serious money investing in EGCs but in each such case when I was invited to tag along with the pros. On my own? Don’t ask.

That said, for a variety of reasons, including the eclipse of public markets and the consequent closing of the IPO window in 2001, the venture capital community has shrunk to that handful (relatively speaking) of funds that are exempt from the law of gravity. In my view, however, there is opportunity courtesy of Title II and PPOs, to revive the asset class and, at the same time, realistically democratize [5] the opportunity.

The first step is to give investors confidence that an investment in a given EGC is a good idea. Simply posting pitch materials online is not likely to be enough. As I say, it is early days and we will see; but a batting average around 10 percent is not likely to attract the smart and rich. One can object that angels invest in EGCs and, according to the Halo Reports of the Angel Capital Association, the returns which the professional, as I put it, Angel networks achieve is attractive, both absolutely and relatively. However, most Angel networks enjoy a special advantage. Not atypically, one or more members of the Angel network is a retired executive who has spent his or her career in the business in which the EGC aspires to succeed. The point of the story is that returns on private investments depend on exits and, like as not, an Angel network (average size 50 investors, almost all of whom have business experience) houses one or more voices of experience who can go on the Board and guide the founder to a trade sale because, for example, the Angel knows personally the directors of development at J & J and Merck and what is on their radar. Moreover, Angels limit their investments to companies located within driving distance so that representatives of the network can visit, talk to the management face to face and kick the tires. That discipline and methodology is what enables Angel returns to hover above 2x. Not so with business plans posted from anywhere in the world, auctioning the investment to all comers.

That being the case, what can Rule 506(c) accomplish? In my view hybrid venture funds, which are elaborately described in in a paper of mine (“Hybrid (Pledge) Venture Funds and Accredited Crowdfunding”) may well be the answer. The hybrids are so-called pledge funds [6] … investors recruited and opting into opportunities, deal-by-deal. Hybrids don’t charge success fees on investor recruitment like brokers nor do they clip the investors for their organizational expenses. They do charge a 20% carry but, as the SEC Staff has recognized, that aligns their interest 100% with that of the investors. They get a 2% management fee but someone has to get paid in order, as an experienced investor once remarked to me, to keep the lights on. The point of the story is that the hybrid venture fund’s job is not done until there is an exit and elbow grease to that end is required over the life of the investment.

In short, that is where I think the future lies and the current statistics at least as I read them (patting myself on the back, of course) bear out that proposition. Once you get a hybrid organized with, say, three members of the GP’s investment committee who enjoy significant experience in the venture space, you have the formula. The individuals I have in mind have good track records investing OPM but are discouraged by the prospect of spending anlother three years raising the next venture fund. Moreover, because the “limited partners” (in fact members of each portfolio LLC) are recruited online for the deals the hybrid GP members select, the managers can spend 95% (+/-) of their time in sourcing deal flow … which is what they should be doing in the interest of all hands … versus 50% looking at deals and 50% trying to get the next fund raised.

Moreover, assume we are talking about for the hybrid pledge funds, curating and chaperoning ten to fifteen investments (average, investment size, say, $10 to $20 million). To raise that kind of money, they need a minimum investment size (subject to exceptions in very special cases) of, say, $200,000 to $400,000. That minimum pre-screens the investors to those which qualify as accredited. The three safe harbors in the Title II regulations do not include minimum investment size but I can testify that it is unlikely, to the vanishing point, that the SEC Staff or a judge would fault the issuer and its counsel for taking an investor’s word for it (the investor having filled out a detailed questionnaire that he or she is “accredited”) if the minimum investment size is in excess of $100,000. I daresay that number could be lowered to $25,000 and have said so in my published article, [7] but let’s call it $100,000 for this purpose. You, the investor, get talented VCs, experienced in the asset class, track records available for review, who can afford to spend their time sourcing the best possible deal flow.

Further, my vote is that the hybrids can and should go beyond this tender to potential investors by adding a variety of benefits.

First, and selfishly, I think investors should be able to review VC Experts valuation and deal terms tool to give them a benchmark to understand whether the pre-money the EGC is looking for is in the ballpark. [8]

Secondly, I suggest the hybrids work out arrangements formal or informal, with secondary trading platforms such as SharesPost and SecondMarket so that, after a specified period of time (say, three years), the shares in each EGC are listed for secondary trading and the investors, accordingly, enjoy liquidity ... perhaps not perfect, of course, but certainly in today’s environment an attractive option for each investor to consider. I further suggest the hybrids poach the advantages the Angel Networks enjoy. They establish relationships with selected Networks, probably informal but nonetheless both sides are committed, which enable the Hybrid to look at a piece (the back-end) of deals which each Angel Network enjoying a handshake with the hybrid) is in the process of syndicating. Angel Networks even when supported by Angel side car funds, can lust for a $5 million deal but lack the dry powder to close at the specified amount. The hybrid gets to review and join the syndicate if it elects, advantaged by the due diligenceand the professional experience which the Angel network has devoted to the screening process. See my “Conveyor Belt” [9] article for elaboration on this possibility. An Angel network can also bring an Angel backed deal to a friendly hybrid for the Series C or Series D round, the handshake including an informal treaty by which the hybrid avoids burning out or cramming down the Angel investors.

Finally, as the hybrid pledge fund goes from deal to deal, it acts as a dating service in screening investors … like-to-like. As each deal goes online and the vertical is specified … medical devices … investors with a stated interest in, perhaps only in, medical devices are invited to go to the head of the line.

In short, hybrid principals … get your engines started.

[1] Bartlett, “Reasonable Steps to Verify Accredited Investor Status,”

[2] Bartlett, The JOBS Act - Title II: Online Solicitation of Accredited Investors The Platform as a Dating Service


[4] This is a joke about a hyper-enthusiastic issuer who markets its products by claiming that the investors will get rich if only 3% (+/-) of the market is penetrated. When braced for proof, the founder points out that the products are finger rings designed to be sold in China, there are a billion Chinese; and each of them has 10 fingers … so the market is 10 billion. It won’t take much, boasts the founder, to turn a profit on 3% market penetration under these circumstances.

[5] Indeed, in 1980, given the track record of the venture capital asset class, Congress, with the aid of Ned Heizer and Dick Testa, attempted to democratize the asset class by creating a special breed of registered investment companies called Business Development Companies (“BDCs”), with venture fund economics (2 and 20) but as closed end public funds available for any and all investors on the street. The objective was economically sound but did not work as structured by the Congress and the SEC.

[6] The instant suggestion is in favor of funds which curate and chaperone multiple deals but with investor opting in to each portfolio company housed in the LLC. So-called search funds are also likely to proliferate … online single purpose funds for Rule 506(c) sourced investors. My focus is on the pledge funds but no disrespect to search funds.

[7] Again, see the “Reasonable Steps” article cited in footnote 1.


[9] Bartlett, “From the Embryo to the IPO, Courtesy of the Conveyor Belt (Plus a Tax-Efficient Alternative to the Carried Interest),” The Journal of Private Equity, Winter 2011.

Joseph W. Bartlett, Special Counsel,

Joseph W. Bartlett is special counsel in the Corporate, Securities and Financial Institutions practice. A recognized pioneer of the national private equity and venture capital bar, Mr. Bartlett contributed to the original models for private equity and fund of fund partnerships. His experience extends to alternative investments, venture capital, emerging companies, corporate restructurings, private equity and buyouts. Mr. Bartlett's practice includes serving as counsel to asset managers, including those of major public and private equity funds, with a focus on technology companies, and he has also served as trustee of a series of public mutual funds and chair of a public REIT. His venture fund work began with the first Greylock fund, and he has drafted documents for several of the largest and most successful LBO funds.

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Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Joseph W. Bartlett. This work reflects the law at the time of writing in December 2013.