How Influencers Can Legally Raise Capital in Public

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Alex Pattis & Zachary Ginsburg
March 31, 2024

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How Influencers Can Legally Raise Capital in Public

As “raising in public” becomes more normalized and the influencer → VC industry begins to heat up, we wanted to share legal insights on how to raise VC capital in public. The interview below between David Teten (Venture Partner at Coolwater, an investor in VC funds and runs an accelerator for emerging VC fund managers) and Nik Talreja (Sydecar CEO and Last Money In Partner) is a great piece that can help upcoming VCs/Syndicates/Founders better understand the legal framework on how to raise in public, while staying compliant.

We’re excited to present Last Money In readers with the full interview below. 

How can influencers raise capital for companies or funds, without running afoul of restrictions on “general solicitation”?

The 2012 bipartisan JOBS Act was supposed to empower funds and individuals to raise capital more openly: to publicly advertise their track record and what they’re selling, just like almost every other industry. However, as far as I know, the great majority of private capital raises for funds and companies are still not using general solicitation. Winter Mead, Founder & CEO of Coolwater, an accelerator for emerging fund managers, said: “Fewer than 5 of the 180 emerging managers we’ve worked with are raising via 506c, in order to get in front of more retail LPs, who are generally already following the GP, e.g., through the GP’s newsletter or community. At this point, all of them are currently planning to do 506c again for their next fund.” 

Why has general solicitation not become more widely used among investors in alternative assets? There are four disadvantages to general solicitation. 

  1. General solicitation creates an obligation to verify that investors are accredited. William Stringer, Founder, Chisos, said, “The benefits of 506(c) were clear when we were raising smaller checks into a small fund from individual accredited investors. However, because of the additional information burden we almost lost a few larger, more sophisticated investors that did not want to be bothered for a relatively small investment.” You can typically outsource this for as little as $60 to companies such as VerifyInvestor.com or EarlyIQ. Or, Yoni Tuchman, Fund Formation Partner at DLA Piper, said, “Include a form letter in your sub docs that the LP can have their lawyer or accountant sign.”

  2. Time efficiency. General solicitation requires engaging with many potential investors, most of whom are just tire-kickers, not check-writers. Founder Pete Cashmore observed, “Smaller (or non-professional) investors may have unreasonable expectations of returns, which could result in conflict in the case of failure.”

  3. Signaling. When you’re raising capital for a fund (or private company) you’re fundamentally selling a luxury good, which is seen as more valuable because it’s scarce. General solicitation damages that perception. 

  4. Inherent conservatism of LPs. Brian Laung Aoaeh, Founder & Managing General Partner, REFASHIOND Ventures, said, “We chose not to do general solicitation for our institutional fund after doing a 506(c) rolling fund because we got the sense that most institutional LPs are not yet very comfortable with the rules. Explaining that a certification from an attorney or accountant would be sufficient did not appear to be sufficiently persuasive.”

With that said, what is the best way to market your capital-raise to potential investors, while staying compliant? This is particularly relevant for influencers who have an audience, as many emerging fund managers do.

David Teten, Venture Partner at Coolwater, interviewed Sydecar’s CEO, Nik Talreja, to provide some guidance based on his deep expertise in this area.

David Teten: Hi Nik. Can you introduce yourself and Sydecar?

Nik Talreja: I’m the Co-Founder and CEO of Sydecar, a fintech company on a mission to bring more transparency, efficiency, and liquidity to private markets. The idea for Sydecar unfolded in my mind during my decade-long career as an attorney working in capital markets and then working directly with startups and VCs on financing events. 

I practiced securities and transactional law at Weil, Gotshal & Manges and Cooley before branching out and starting my own law firm, where I supported early stage startups and investors. The experience of working with stakeholders on all sides of these transactions – companies, VCs, and their LPs – made me realize how fractured the ecosystem is. Every person is kind of speaking their own language and it makes it difficult to communicate and ultimately to transact. Every VC has their own fund model which has to be supported by a service-driven fund administrator. To add to that, there are many gatekeepers – law firms, accountants, tax advisors – who are basically charging rent for customization and tradition.

It occurred to me that there could be a better way of approaching fund administration, where product mediates the back and forth between stakeholders, and where basic structures are standardized. It was also important to me that the fund administration model isn’t connected to any marketplace that dictates how you should operate. While pursuing my legal career, I began investing behind some of my clients and worked hard to build a small LP base. I didn’t want to bring hard-earned relationships to a marketplace where they’d be exposed to other fund managers – and I figured other new managers would feel the same. Sydecar was born as a result.

David Teten: Does Sydecar currently support fundraising via general solicitation?

Nik Talreja: Sydecar's standard SPVs and Funds are governed by 506(b) meaning that general solicitation isn’t permitted; managers can only raise from people they have an existing relationship with. We can support select 506(c) deals and are happy to discuss with customers on a case-by-case basis.

We’ve thought about more widely supporting 506(c) funds in the future, especially if it’s something that our customers want. But to start with, we saw the most demand for raising under 506(b) and so chose to focus on that. It’s been interesting to see how some of our customers leverage communities they have built to help them fundraise even without the ability to generally solicit. We’ve seen a lot of creativity.

David Teten: Can you share more about that? How can someone who has built a following online successfully raise from their community under 506(b) without general solicitation? 

Nik Talreja: Sure thing. To start with, it’s important to really understand where the line is drawn between 506(b) and 506(c). Under 506(b), you can raise capital from any accredited investor so long as you are not using general solicitation. Practically speaking, this means that one cannot raise money for an investment vehicle (SPV or fund) from individuals that they don’t have a “substantial preexisting relationship” with. This includes marketing the investment opportunity on social media, websites, television, radio, or any other public channel. As a result, individuals who want to avoid 506(c) general solicitation and have a large Twitter following or newsletter can’t directly ask their audience to invest into a specific deal or fund that they are raising for. 

Rather than marketing a specific deal or fund, people with online audiences can market themselves and their expertise to stay compliant under 506(b). Using marketing and PR channels to highlight your general success as an investor and then giving people a way to get in touch can be an effective mechanism to convert an audience to an investor base. The big takeaway here is that you have to establish a “substantial preexisting relationship” with an investor before inviting them to participate in a specific deal.

In 2015, the SEC issued a “No Action” letter to Citizen VC relating to the topic of general solicitation and the definition of a “substantial existing relationship”: “ a "substantive" relationship is one in which the issuer (or a person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree's financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”  Read the full letter here. 

The bottom line is that you cannot market the opportunity directly to people you don’t know without triggering 506(c). In the eyes of the SEC, you do not know your audience. However, if a member of your online audience fills out a form sharing information about their background and you subsequently schedule a 1:1 phone call with the investor, that generally meets the standard for a substantial existing relationship. 

So the key points are:

  • Do not market specific opportunities broadly.

  • Do not market an opportunity directly until you’ve established a “substantial preexisting relationship” with the investor.

  • Filling out a form and jumping on a call constitutes a “substantial preexisting relationship” in the eyes of the SEC.

While it may take more time, it’s not impossible to establish a relationship with someone you met through social media or a newsletter sign-up before sharing deal flow with them. Of course, when raising from a large audience, managers should expect a low conversion as compared to raising from a traditional warm introduction. Having a smooth process in place to establish relationships and share information is key. 

A final note on all of this is that whether it’s 506(b) or 506(c), the investors involved need to be accredited. For 506(b), the investor can check a box to confirm they’re accredited once a “substantial relationship” has been established. For 506(c), the investor will need to provide proof of accreditation through sharing account statements or providing a signed letter from an accountant or lawyer.

David Teten: If the potential investor participates in a webinar or an in-person gated event, does that suffice?

Nik Talreja: A "pre-existing substantive relationship" exists when there has been some interaction between the two parties, whereby the investor communicates sufficient information to the issuer (in this case, the fund manager) for the issuer to determine their financial circumstances and sophistication. If the investor is just an attendee of a webinar hosted by the manager, and the two parties don’t directly interact, then they have not established a pre-existing relationship.

If participation in the webinar (or any other virtual or in-person event) involves the investor disclosing their financial status and investment experience to the manager, and if it is reasonable for the manager to believe the investor, then yes, this would be permitted. 

David Teten: Do you have any examples of folks who have done this successfully?

Nik Talreja: A good example is Nik Milanovic, founder and GP of The Fintech Fund. Nik launched his newsletter, This Week in Fintech, in 2019 as a way to share his thoughts about the evolving fintech landscape with friends, family, and select coworkers. The newsletter grew and people started asking Nik how they could invest into the companies he wrote about. Before too long, Nik had a full-blown syndicate. Because his newsletter subscribers were initially all people he knew personally, they were fair game to raise money from under 506(b). As the newsletter and syndicate grew, Nik built out a process for converting a subset of newsletter subscribers (those who were accredited and had a genuine interest in his deal flow) into syndicate investors. 

Once an investor is accepted into his syndicate, Nik adds them to a private Slack channel where they can see new deals, discuss diligence, and ultimately decide if they want to invest. The investor relationships and track record of success that Nik built through his syndicate investing ultimately allowed him to raise a $10M Fund 1 in 2022 (also under 506(b)).

David Teten: Can you expand on the process that Nik built out for converting a subset of newsletter subscribers into syndicate investors? 

Nik Talreja: The benefit of Nik having run a newsletter in which he shared his perspective on emerging companies with his reader base was that they started to get comfortable with – and then interested in – how he thought about these companies. He started to receive inbound demand from readers asking how they could invest in early-stage fintech companies and grow their dealflow. That made it pretty easy to consolidate them into a group and build the syndicate off an active, dedicated early group.

David Teten: What are examples of compliant language fund managers have used to alert investors to the investment opportunity in funds?

Nik Talreja: Keeping your language general is key to staying compliant under 506(b). You can talk about investing. You can even talk about the opportunity for people to invest alongside you. You cannot invite people to invest in a specific opportunity.

Here are some examples of language that can be used to alert investors of the opportunity without triggering 506(c):

“We’re always looking for new investors to collaborate with! If interested in participating as an LP or co-investor, please fill out this form or reach out directly.”

“Thinking about your first investment? We’d love to learn more about your interests and see if there’s room to work together.”

“We’re holding a webinar for accredited investors only to learn more about our fund and the companies we think are highest potential. RSVP here.” [RSVP form includes a self-attestation of accredited investor status.]

David Teten: What are the ‘red lines’ that people with online audiences should avoid hitting which would trigger 506(c)? 

Nik Talreja: Here are some examples of language that would trigger 506(c):

“I’m raising a $10M fund! Reach out if you want to invest.”

“We are running an SPV for SpaceX. If you want to invest please reach out.”

You’ll notice that the language for 506(b) from earlier is general and pushes towards gathering more information from the investor, while the language that triggers 506(c) is specific.

Being general with your language and driving potential inventors to provide more information is key in order to satisfy the “substantial preexisting relationship” rule that sits between 506(b) and 506(c).

If you do have a “substantial preexisting relationship” with an investor, it’s 506(b).

If you do not have a “substantial preexisting relationship” with an investor, it’s 506(c).

David Teten: Given the current market sentiment of institutional LPs being more cautious about deploying into VC, do you expect to see an uptick in 506c offerings in the coming months?

Nik Talreja: No, I expect the contrary. I think we’ll see a decrease in the number of deal and fund managers overall, and the people who continue deploying capital will be those who have quality relationships with LPs and access to quality investment opportunities. These repeat managers tend to rely on 506(b) given their strong relationships with LPs and meaningful track records.  The quality of your relationships has become increasingly important through the down market – and I expect this will continue to be the case. 

For an aspiring manager to be successful in this environment, they have to spend more time deepening trust with LPs, sharing their decision-making process, and explaining the quality of their deal flow. 506(c) type offerings assume that low-touch LP relationships are sufficient, which is at odds with what I expect in the current environment.

David Teten: Are there any differences in the types of investors that invest into 506b offerings, versus 506c?

Nik Talreja: 506(c) offerings typically involve more participation from "retail" investors, or people who invest non-professionally. The term has been used to describe investors who aren’t well versed on an asset class, don’t have institutional relationships, and don’t have access to invite-only deals.

In this sense, 506(c) offerings cast a wide net -- there is no need for a deal sponsor to have a relationship with an LP, or vice versa -- and so a sponsor can post an offering on social media where anyone can view details and get involved, including retail investors.

David Teten: What are the consequences of unintentionally using general solicitation and failing to switch to a 506c offering?

Nik Talreja: It's always best to consult your attorney to ensure you get a full download on your particular situation, so consider the following with a grain of salt. If you generally solicit an offering that is registered under 506(b), you may lose your securities exemption under 506(b) and the result could be that:

  1. Your securities are considered "unregistered" and investors may have a right to cancel or recall their investment.

  2. You could be penalized and have to pay fees to regulatory authorities.

How large is this risk? Tough to say, but there are many cautionary enforcement actions. Bottom line: it's always best to consult counsel if you are thinking about raising for an SPV or fund and have questions about how you are or are not allowed to source investors.

David Teten: Is it worth avoiding 506(c)?

Nik Talreja: Ultimately, this is a matter of personal preference. 506(c) is doable if you’re willing to jump through the hoops of verifying each investor’s accreditation. It’s another step in the process, but it shouldn’t make or break an investor’s decision.

That being said, taking on LPs that you don’t personally know creates new risk – just like doing business with strangers. Whether you run a 506(b) or 506(c) process, it’s important to understand who you’re working with and connect with their LP base as much as possible in order to build a long term relationship.

Any manager who is considering raising under 506(c) should consult their legal counsel and / or fund administrator. While Sydecar doesn’t generally offer a 506(c) fund structure, it’s something that we’re actively exploring via a pilot program. To learn more, request a demo with a member of the Sydecar team today. 

The information provided in this article is for informational purposes only and should not be construed as legal advice. The content is intended to offer general guidance and insights on the topic discussed. It is not a substitute for professional legal advice tailored to your specific situation. Always consult with a qualified attorney or legal expert for advice pertaining to your individual circumstances.

Further reading: 

If you enjoy this article, feel free to view our prior articles on SPV dynamics: 

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✍️ Written by Zachary and Alex