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The Deal: SEC Rule on Advertising May Be Too Tough for Startups

To be sure, many in the industry fear such information may lead to enforcement actions.

Hanks said that many small securities issuers do not hire experienced attorneys and, as a result, may not understand that proposed Rule 510T would require them to submit written communications following the guidelines of Rule 405 under the Securities Act. Rule 405 defines graphic and broadcast material as written communications.

"It will not occur to people not steeped in the technicalities of securities law that a video is 'written,'" Hanks stated in her letter. As a result, she said many common forms of general solicitation and advertising will "remain innocently unsubmitted."

Hanks also asserted that because there is no way for the SEC to determine whether all materials have been submitted, there may be a built-in incentive to undersubmit.

"There is every incentive for issuers to submit whatever materials they find easiest to submit and deliberately withhold materials they least want the SEC to see or which present challenges to uploading," she wrote. The withheld materials are most likely to include innovative approaches to fundraising, Hanks said, while the submitted materials are most likely to include traditional, text-heavy disclosures such as private placement memoranda.

Materials such as slide-decks, videos, legal documents, platforms that allow for due diligence or information calls between issuers and investors will present challenges to issuers in terms of their filing requirements.

For the SEC, building a system that can handle the potential volume and different types of data will be "difficult and expensive," Hanks wrote. In addition, the SEC's possible use of information gathered from such filings in enforcement actions may create incentives for issuers to feign compliance and withhold materials that might raise concerns with regulators.

Hanks said the SEC would be better served in its efforts to be informed about the small-cap financing market by relying on the existing array of advisory bodies and working groups on small business and investor protections.

Many of Hanks' concerns were echoed by Scott Purcell, the founder and CEO of Arctic Island LLC, in a July 22 letter to the SEC. San Francisco-based Arctic Island plans to offer software and services to help small businesses raise private placement financing.
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