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Tweets Could Jeopardize Private Deals

NEW YORK (The Deal) -- A top Securities and Exchange Commission regulator acknowledged Friday that certain types of market-moving tweets by startup or fund executives could inadvertently disqualify a company from raising capital for 12 months as part of an investor protection requirement under review by the agency for ad-friendly private deals.

"We recognize in the proposal that there could be inadvertent tripping, so it is an issue that we are aware of," Keith Higgins, director of the SEC's Corporation Finance unit, told The Deal after speaking at a conference in Washington. "Under the rule as proposed it would be problematic. That was the proposal. We recognize that people might not know what a general solicitation is, that it could be inadvertent, and we've gotten a lot of helpful comments on it."

At issue is an SEC proposal that would increase protections for investors when they allocate capital to startup businesses, buyout shops and hedge funds that employ a new rule allowing them to publicly advertise private placements. The proposal would increase obligations associated with an SEC filing requirement known as Form D, which is available publicly on the agency's website and reports who is making an offer, its size and other details.

Firms and funds raising capital privately aren't punished for failing to file a Form D, and many don't. The SEC has proposed to toughen the Form D filing requirement as an added investor protection following the 2012 JOBS Act's removal of restrictions on advertising for private placements.

Startups and angel groups, in particular, are concerned about a provision that would require them to file about a wide variety of "communications," potentially including market-moving tweets, as soon as they make them or even perhaps in advance. Failure to file the material on time would disqualify a firm from raising capital for 12 months. That's an eternity for emerging companies, who argue that it could drive their businesses into bankruptcy.

Marianne Hudson, executive director of the Angel Capital Association, argued on the sidelines of the conference, which was held by the Angel Capital Association, that the disqualification provision is hugely problematic. She said startup companies would like to see some sort of ability to appeal a disqualification before a firm is prohibited from raising capital for 12 months.

Higgins said the issue is on the agency's list. "We know it is something that we have to accommodate and fix and make work," he said.

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