Emerging Markets Law

Showing 2 posts from May 2014.

New SEC Guidance on Advertising Intrastate Crowdfund Offerings

The SEC recently issued additional guidance on the use of advertising in support of intrastate crowdfund offerings.

Unfortunately, like much that comes out the SEC these days, it's not very helpful.

I have pasted the guidance (issued in the form of FAQs) at the end of this post.  When you read the SEC's guidance you'll see what I mean about not being helpful.

By way of background, roughly a dozen states have adopted rules to permit intrastate crowdfunding, using the exemption for purely intrastate offerings under Section 3(a)(11) of the Securities Act of 1933.  One of the few SEC rules issued under Section 3(a)(11) is Rule 147, which provides a safe harbor exemption for purely intrastate offerings where all of the investors are residents of the state in which the issuer is organized.

Importantly, Rule 147 requires that all offers and solicitations of investment be made only to residents of the state where the issuer is organized.  When Rue 147 is applied to intrastate crowdfunding, however, the conflict between the SEC's attempt to control the flow of information and the basic principle of crowdfunding (that sharing information creates benefits for all) become apparent.

Issuers trying to use intrastate crowdfunding have struggle to understand where they should draw the line between basic communications to the global market (i.e., "We are MXYPLYK and we are launching") versus specific investment solicitations (i.e., "Please buy our stock!").  One might have hoped that the SEC would provide a bright line test to distinguish between the former and the latter.  One would be disappointed.

As you will see from the SEC's FAQs, the SEC staff clearly understand the tension between the use of the Web (which is a global communications medium) and the intrastate limitations of Rule 147 (which limits investments only to residents of the issuer's state).  A helpful bright line test, for example, would have ignored global communications regarding the existence of the crowdfund offering so long as the issuer took reasonable steps to ensure that only in-state residents were permitted to actually invest.  But the SEC did nothing helpful.

Instead the SEC's comments are nothing more than a tautology.  Consider for example this helpful nugget of SEC wisdom, "Any such general advertising or solicitation, however, must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and Rule 147 be made only to persons resident within the state or territory of which the issuer is a resident."  Well, of course.  that's what the rule says.  It doesn't advance our understand of how the SEC will interpret the rule (in an enforcement action, for example) when the SECs guidance can be reduced to saying, "Make sure to obey the rule."

Alas, issuers and their counsel can simply do their best to follow  the rules and proceed cautiously as the SEC isn't giving away any hints as to how they plan to interpret existing rules governing intrastate crowdfund offerings.

Excerpt from SEC FAQs:

Question 141.03

 Question: If an issuer plans to conduct an intrastate offering pursuant to the Section 3(a)(11) exemption, may the issuer engage in general advertising or a general solicitation?

 Answer: Securities Act Rule 147 does not prohibit general advertising or general solicitation. Any such general advertising or solicitation, however, must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and Rule 147 be made only to persons resident within the state or territory of which the issuer is a resident. [April 10, 2014]

 Question 141.04

 Question: An issuer plans to use a third-party Internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable securities crowdfunding within that state. Assuming the issuer met the other conditions of Rule 147, could it rely on Rule 147 for an exemption from Securities Act registration for the offering, or would use of an Internet portal necessarily entail making offers to persons outside the relevant state or territory?

 Answer: Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory. In the context of an offering conducted in accordance with state crowdfunding requirements, such measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address). Of course, any issuer seeking to rely on Rule 147 for the offering also would have to meet all the other conditions of Rule 147. [April 10, 2014]

 Question 141.05

 Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147?

 Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad, indiscriminate manner. Although whether a particular communication is an "offer" of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business. [April 10, 2014]

Frustration Rises Over Crowdfunding Rules

Posted In Crowdfunding

As reported in the Wall Street Journal, frustration is rising over the SEC's failure to implement crowdfunding rules under the 2012 JOBS Act.

The JOBS Act was adopted in April 2012 and required the SEC to implement rules to make interstate crowdfunding possible within 120 days.  Now, two years after the law was passed, the SEC has been unable to finalize its own rules.

Against the backdrop of this frustration, Congressman Patrick McHenry (R-NC) has announced plans to introduce new legislation that would improve the crowdfunding provisions of the JOBS Act.  If that legislation were adopted into law it would start a new cycle of SEC rule-making.

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