General Solicitation and Product Roadmaps

Fintech is a world not much different than regular consumer or b2b businesses except for one huge external element that takes almost equal priority on roadmap and feature buildout – Regulation. A lot of the consumer web internet concepts cannot be blindly applied to Fintech, you have to watch out for what is legally permissible. In this blog post I’m going to talk about user acquisition in the context of what the SEC defines as “General Solicitation”

Some legal background:

A key provision in the investment company act of 1933 (Reg FD) is the ban on “General Solicitation (GS)”. Any private placements i.e. investment in private, off exchange vehicles are open only to “Accredited investors” and thus cannot be “Generally Solicited”. What this means in layman speak is that you cannot go run a banner ad on the internet, advertise to investors with SEM and perform the usual growth hacking activities. In addition there cannot be any language on the website/marketing channels that indicates to the the general public that “if you invest with us you will get X% return” i.e a promise of a return. The logic being that these private placements are only available to sophisticated “accredited investors” and hence by advertising openly, non accredited investors can also be enticed to invest which in effect is against the spirit of the private placement. The GS ban is articulated in rule 506(b) and it also states that the accredited investors who invest in the private placement should have a “pre-existing” relationship with your firm. The SEC defines (not conclusively, they just provide a sample of) the criteria to ascertain and qualify an ” accredited investor“.

These requirements pose interesting challenges to product feature design. There are two distinct sets of product policies that a PM has to put in place to ensure compliance without stifling innovation.

Public Data policy:

Your requirements have to be hyper sensitive to providing information about investor data such as “expected rate of return” and portfolio characteristics lest it be construed as an advertisement to invest in the placement. A good way to handle this is to put a public data content guideline (aka something similar to a UI style guide – i.e a regulatory content style guide) in place to ensure that content used on the public website and any marketing channel (blogs/twitter/ direct mail) does not violate the GS ban. In addition, ensure that  a regulatory style guide check is included as part of a key milestone/ gate at launch activities.

Feature design and tracking:

Your users (accredited investors) still need access to detailed portfolio and return statistics. It does not make any sense to not have these online in your web application as this should be your primary communication channel to your user base. Once a data policy is in place, feature design has to incorporate strict authentication to ensure that the investor statistics reside behind a password-wall and only accredited investors can get through that wall.

You have to design tracking requirements solely for the purposes of establishing pre-existing relationships. Typically PMs are used to tracking engagement metrics such as visitors, funnel stats etc.  However, you now have to go one level deeper and integrate user tracking with an internal CRM system to keep track of the investor-firm relationships. These  tracking tie-ins have to also ensure that this tracking data is saved for an extended period of time in order to comply with audit requirements.

JOBS act changes:

The JOBS act passed in 2012 significantly changes the landscape in the context of General Solicitation. It does away with the ban on General Solicitation, however don’t pop the champagne just yet 🙂 some pieces get simpler but there are hidden requirements that will affect your product roadmap. The new rules are defined by the SEC in rule 506(c)

With the lifting of the GS ban firms are now free to advertise to the general population of investors. This loosens up the data policy a bit and there is a lot more information that can go on the public internet. From a product perspective the general rules of SEM/SEO optimization now apply and the content should take advantage of that. PMs should be planning for this hard. The “pre-existing” relationship condition is also relaxed, which has roadmap prioritization impacts. If you are just starting out, great! you don’t have to build out the CRM integrations. If you already have the CRM tie ins, here is an opportunity to de-prioritize enhancements.

Pre- jobs act the burden for proof for qualifying and verifying that a particular investor is accredited was left to the investor. This means that we can rely on self reported data from the investor indicating that he is accredited. In designing the password wall to ensure compliance with rule 506(b), all you needed to was to design a simple web form and rely on self reported information from the investor to let the investor through and see statistics.

With the new rule 506 (c) the burden of proof for validating whether the investors is accredited is now on your product. Self reported information is not going to cut it anymore. This has huge roadmap implications. The SEC lays out a  few mechanisms on what is required to validate an investor and you will need to develop a solution that automatically accredits the investor or at least build some sort of manual process that accomplishes accreditation.

Future Market opportunities:

I personally think this is a huge opportunity. An Investor Accreditation API service would be a core need for our market. It doesn’t make any sense to develop an in-house solution to meet this need, this is a not a feature that drives value for most businesses. However this could be an interesting play for somebody with an existing platform that already has a lot of accredited investors. Most investors would be wary of giving up their personal financial data to multiple providers but would be really comfortable handing it to *one* provider that they trust, who can then federate it other providers. Second market is definitely going down this route, and I bet we will see “Secondmarket login” aka Facebook login in the future. If this isn’t on their roadmap, it should be :).  I expect more players to enter this space. Is this the beginning of the wave of investor infrastructure API’s?

Hope this serves as good primer to General Solicitation for PMs. Drop me a note in the comments!


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