Fundraising is difficult work and founders work tirelessly to remove barriers to investment. Founders may view a minimum sales condition to closing – a condition that the company will not close its round of funding until it receives a threshold investment amount – as a way to encourage and reassure potential investors. Investors may also insist that this type of condition be included in the deal. Founders should be aware, however, that securities offerings that are contingent upon raising a certain amount of capital (contingent offerings) are subject to the requirements of Rule 10b-9 under the Securities Exchange Act of 1934, which introduces additional risk and procedural requirements to the fundraising process.
Rule 10b-9 is one of the antifraud provisions of the federal securities laws that applies to all capital raising transactions (whether public or private) structured as contingent offerings. Rule 10b-9 makes it a “manipulative or deception device or contrivance” to represent that a securities offering is a contingent offering if funds that are wired by investors are not returned to them in the event that the contingent conditions are not met. Over time, the Securities Exchange Commission and US courts have interpreted Rule 10b-9 to cover a broad range of circumstances and to impose additional procedural requirements on issuers. The SEC has taken the position that contingent conditions are not met, and an issuer is in violation of Rule 10b-9, if certain terms of a contingent offering are changed in the absence of additional steps by the issuer.
Founders that plan to represent to investors that their capital raise is conditioned on satisfying a minimum sales condition should first consult with outside counsel.