Final and Proposed SEC Rules Allowing General Solicitation are Out – Crowdfunding Rules for Non-Accredited Investors to Follow-And So Too Should Caution

Posted on July 19, 2013 by Samuel Guzik

On July 10, 2013, the SEC released final SEC rules, effective in September 2013, which will allow general solicitation and advertising in unregistered debt and equity offerings so long as all of the purchasers are accredited investors and the issuer takes reasonable steps to assure itself that its investors are accredited.  As one might expect, this long awaited announcement brought with it a great deal of its own  publicity, much of it generated by service providers who hope to immediately and directly benefit from business opportunities created by the new rules.

One would certainly expect a great deal of hype to follow the new SEC rules and the opportunities created – particularly from those who hope to benefit financially from its implementation.  However, one would hope that those who intend to profit from riding the wave generated by the JOBS act, including the crowdfunding wave yet to be unleashed, would be more circumspect and deliberative in their communications.

Case in point:  SeedInvest, a company which holds itself out on its website as connecting accredited investors to high quality startups and small businesses seeking funding. https://www.seedinvest.com.  Notably, SeedInvest has been cited by Forbes as one of the top 10 crowdfunders of 2013.  http://www.forbes.com/sites/groupthink/2013/01/31/u-s-crowdfunders-the-top-contenders-in-2013/#

This morning I received an email from SeedInvest informing me of the recent SEC rule changes and how SeedInvest hopes to assist offering participants.   I reprint it below because I believe it represents a “teachable moment” about investing in the Internet age.  Here we go:

“Dear Sam,

In a historic and long awaited move, the SEC voted 4-1 to implement regulations under Title II of the JOBS  Act to lift the 80 year old ban on general solicitation for  securities offerings and bringing the securities industry into the internet    age.

This means that in about 60 days (around late September) companies will be able to generally advertise their securities offerings, so long as all the purchasers of these securities are Accredited Investors.

Companies will be required to take greater steps to verify the     accreditation of their investors, such as checking tax returns, W-2s or  getting certifications from a lawyer or CPA with personal knowledge.     Companies may also be required to make a filing with the SEC 15 days BEFORE  any advertising takes place and they also be required to file all of their     advertising material with the SEC. The penalties for violating these rules are severe, including being barred from raising additional funds using Rule 506 for a full year.

SeedInvest continues to be actively involved and at the forefront of these changes, and has developed a suite of tools to streamline all of these new processes and filing requirements. Companies will be able to use SeedInvest‘s social media tools to push information about their company and their offering to all of their Twitter, LinkedIn and  Facebook followers. Companies can also leverage our automated investor accreditation and verification tools to meet the heightened requirements with ease, comfort and minimal hassle.

We are extremely excited about these upcoming changes. However, it is important to note the following caveat:

You cannot advertise until late September and you will need to make     ADVANCE filing with the SEC 15 days BEFORE you advertise. 

For more details and up to date information on the new rules, check out our ongoing coverage on the SeedInvest blog.

Best,

The SeedInvest Team

SeedInvest, LLC

447 Broadway, Suite 2 | New York, NY 10013

(O) 646.291.2161

contactus@seedinvest.com     | www.seedinvest.com       *                    *                    *                    *                    *

Of course, something is very wrong with this picture, at least as presented by  SeedInvest:

 “You cannot advertise until late September and you  will      need to make ADVANCE filing with the SEC 15 days BEFORE you advertise.” 

Notwithstanding the representation on the SeedInvest website that; “We are laser focused on quality over quantity”, in its haste to get out what appears to be a widely distributed Internet mailing it failed to properly vet its own solicitation materials”:  it wrongly stated that an advance filing with the SEC will be required.

As the final SEC rules make clear, there will continue to be a Form D filing requirement for Regulation D offerings, including those that intend to utilize general solicitation.  However, the current SEC Form D filing requirement only provides for filings after the offering commences.

Importantly, the new SEC  rules proposed on July 10, 2013 do have a requirement that the issuer make an advance filing of Form D if it wishes to utilize general solicitation and rely on Rule 506(c).  But these are simply proposed rules, which may or may not be implemented by the SEC in the future, and which are not part of the recently announced final SEC rules which go into effect in September 2013.

A number of lessons may be drawn from this observation:

  • When it comes to investing, especially Internet investing where information can be disseminated and decisions can be made with the speed of a click of the mouse, do not believe everything you read – do your own due diligence.   Caveat Emptor is still the rule.
  • As the SEC notes on its website, “[I]nvesting is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.” http://www.sec.gov/about/whatwedo.shtml
  • When it comes to something fundamentally new in a highly regulated area such as securities, whether it is Internet solicitation of investors or equity crowdfunding by non-accredited investors, mistakes will invariably be made at the outset, even by the most well intentioned.  So extra caution by all involved is in order – and the appropriate professional advice on securities law compliance should be sought before one acts– not after.

About the Author – Samuel S. Guzik is a corporate and securities attorney and business advisor admitted to practice before the SEC and in New York and  California, with over 30 years of experience. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies.  For additional information regarding Mr. Guzik and his firm, Guzik & Associates, please visit his website at www.guziklaw.com.

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