A few weeks ago I wrote an article discussing one of the potential pitfalls – and weaknesses – in the SEC’s new Regulation CF, which became effective May 16, 2016, which allows private companies to raise up to $1 million on an SEC registered internet portal. Though equity crowdfunding was inspired by rewards based platforms, such as Kickstarter, the structure that emerged for equity crowdfunding, Title III of the JOBS Act of 2012, was quite different.
In particular, due to intricate SEC rules and doctrines followed for decades, most often in registered public offerings, the ability of a company (the issuer) to generate public interest in its offering before the required filings are made with the SEC is limited, if not entirely precluded. And one of the principal tenets of Title III crowdfunding was that the issuer would not be permitted to engage in any solicitation activity during the crowdfunding campaign except on an SEC and FINRA registered crowdfunding portal. Though the SEC created a limited exception for Title III crowdfunding, allowing issuers to publicly circulate notices regarding the offering, the contents of the notice are severely restricted, essentially to a brief description of the business and the terms of the offering.
So essentially there are two problems. The first, Title III issuers will be limited in their ability to publicize their offering during the offering campaign itself, and will effectively have no ability to call public attention to an upcoming offering outside of the particular crowdfunding portal.
And there is a second problem, issuers inadvertently engaging in prohibited solicitation activities. The consequences of this can be draconian to an issuer which inadvertently engages in prohibited advertising or solicitation: investors will have the right to get their investment back, from the issuing company and their “control persons” (management).
We are already seeing the second concern playing out – very visibly – in the national media. In particular, at least two live crowdfunding campaigns have been featured in interviews with the CEO in national news publications – while the crowdfunding campaign is live. In SEC/legal parlance, this is a big “no-no.” An excellent article in this regard, from a non-lawyer perspective, was published this week in Forbes magazine. It is a cautionary tale for would be equity crowdfunders to consider before they embark on an equity crowdfunding offering.
So once again, forewarned is forearmed.
For those of you who wish to have more information on what is permitted, and what is not, under the SEC’s crowdfunding rules, I suggest you read my article published last month in CrowdfundInsider.
And for those companies which hope to benefit from fully leveraging the crowd through the internet and social media, and do not wish to be limited to raising $1 million, they ought to weigh their options under Title II of the JOBS Act (restricted to accredited investors) and no limit on the amount of money that can be raised, or Title IV, a/k/a Regulation A+ (a “mini-IPO”) allowing raises up to $50 million.
