In venture capital, clear and truthful communication is crucial when presenting investment opportunities. Over-promissory language refers to making exaggerated or misleading claims about the potential outcomes of an investment, which can be harmful to both investors and the platform hosting the investment. Misleading language not only distorts the reality of investment risks but can also lead to legal consequences for both fund leads and platforms like AngelList.
Why is over-promissory language a concern?
The SEC (Securities and Exchange Commission) is vigilant about preventing misleading statements related to investments. If over-promissory language is used, the SEC may view it as a violation of securities laws, especially if it misleads investors regarding the expected returns or the likelihood of success.
AngelList and fund managers have a shared responsibility to ensure that all claims on investment pages are accurate and fair.
What constitutes over-promissory language?
Over-promissory language typically includes statements that make exaggerated or unrealistic claims about the potential of an investment:
- Unsubstantiated Claims of Success: Statements like “This company is guaranteed to become the next unicorn” or “This investment will definitely double in value in the next year” imply certainty where there is none and mislead investors into thinking the outcome is assured.
- Misleading Statements About Company Performance: Phrases such as “This company has no competition” or “We are certain to achieve a 10x return” falsely present the company or investment as free of risk and competition.
- Exaggerating the Likelihood of Positive Outcomes: Claims like “Our investment strategy has never failed” or “This deal is a guaranteed success” falsely suggest that risk has been eliminated, which is never the case in venture investing, where outcomes are inherently uncertain.
Such statements can mislead potential investors into making decisions based on false or exaggerated assumptions about the investment's potential.
AngelList guidelines on avoiding over-promissory language
AngelList has strict guidelines in place to help fund managers and those running investment vehicles maintain transparency and prevent over-promissory language:
- Deal Information Accuracy: All deal information must be submitted accurately and truthfully. Fund leads are required to represent the deal information to the best of their knowledge and avoid any misleading or overly optimistic statements.
- Avoid Over-promissory Statements: Fund leads must avoid suggesting guaranteed returns, high returns without risk, or any other type of overly optimistic language. All claims about the investment should be realistic and grounded in the available data.
- Clear Communication of Risks: It is essential to clearly communicate all the major risks associated with the deal. This helps ensure that investors are fully informed before committing and are not misled by overly positive language.
Responsibility for Accuracy: Fund leads are responsible for keeping the deal information accurate throughout the life of the investment. If any material changes occur, they must be disclosed, and investors may need to be given the opportunity to reassess their involvement.