500 Startups to openly solicit for new seed fund

Dave McClure’s 500 Startups will openly market its next seed fund, taking advantage of newly approved rules from the Securities and Exchange Commission allowing the broad public solicitation of investors.

The pioneering move will make 500 Startups III one of the first major funds to sell itself in such as manner. Last year in the wake of the SEC’s September decision to lift the ban on general solicitation, ff Venture Capital announced it would follow a similar path. Beyond that, only a handful of small funds have experimented with the concept, said industry experts and lawyers involved in venture fundraising.

Related story: Move by 500 Startups means more firms will openly market funds — peHUB poll

Founding Partner McClure said the move would formalize efforts at 500 Startups to be open about its operations. It also could drum up new investors unaware of the fund.

“It’s possible we may have more visibility,” said McClure. “We can be more open about our approach.”

500 Startups III, the firm’s third flagship fund, has a target of $100 million and has so far raised about $26.9 million, according to a filing Thursday with the SEC. The fund was initially disclosed in a filing in October. The original filing was made under the conventional 506(b) rule prohibiting general solicitation, but the fund has now been changed to the 506(c) open solicitation designation.

The new fund is significantly larger than the firm’s $44.1 million second fund, raised in 2013, and its first fund of $29.4 million.

500 Startups also will raise three smaller funds under the open solicitation rule. They include the 500 Startups Annex Fund, which has raised $4 million toward its $10 million target; 500 Durians, which has raised $7.5 million toward a $10 million target; and 500 Luchadores, which has raised $2.5 million toward a $5 million target.

The firm is partnering with the crowdfunding platform SeedInvest to develop a custom, branded site where prospective investors can view the funds and conduct due diligence, said Ryan Feit, SeedInvest’s CEO.

The site will host a data room, provide access to the investor presentation for each fund and allow prospects to submit questions. Investors can make commitments online with the necessary legal documents traveling back and forth electronically.

Feit said SeedInvest will verify an investor’s identity and determine whether the person is accredited. It also will perform anti-money-laundering checkups and handle fund transfers.

He added that early stage firms are showing a growing interest in open solicitation, more than larger, more established firms that have long held relationships with pension funds and major endowments.

“Over the past few months, we’ve seen a large amount of demand from early stage funds that want to raise capital online,” said Feit. “We expect that demand to increase dramatically with the 500 Startups announcement.”

Photo courtesy of Shutterstock.

Take your pick!

  • Buyouts delivers exclusive news and analysis about private equity deals, fundraising, top-quartile managers and more. Get your FREE trial or subscribe now.
  • VC Journal provides exclusive news and analysis about venture capital deals, fundraising, top-quartile investors and more. Get your FREE trial or subscribe now.