Regulation Crowdfunding (Reg CF), which allows for true equity crowdfunding by small businesses and start-ups, has been in effect for over a year now. The amount of capital raised since Reg CF was launched last year has been steadily increasing as well as the number of portals through which issues can raise money. Senior Contributor to Crowdfund Insider, Georgia Quinn, previously highlighted several pitfalls that issuers conducting a Reg CF offering should be aware of, but I wanted to discuss an issue that is often overlooked and yet is probably the most relevant to issuers: advertising their offerings. Issuers obviously want to market their offerings to raise as much capital as possible, but if they do so in violation of SEC rules, they could end up blowing their entire offering which could lead to some dire consequences.
How and What Can Issuers Advertise?
Under Reg CF, issuers who are selling their securities on a registered portal (of which there are now currently 29), are restricted on how they can advertise their offerings and on the content of any information distributed to the public. Specifically, under Rule 200 of Reg CF, an issuer is explicitly prohibited from advertising the terms of their offering except for a notice that directs potential investors to the registered portal. Additionally, the notice can only include the following information:
- A statement that the issuer is conducting a Reg CF offering
- The terms of the offering, which is defined as the amount, the nature, and the price of the securities offered and the closing date
- Factual business information about the issuer which is limited to the name, address, phone number, and website of the issuer as well as an email address of a representative of the issuer and a brief description of the business
As long as an issuer sticks to these 3 types of information, they can essentially broadcast their offering anywhere on the internet. The first two are relatively straightforward. However, factual business information is what may trip up issuers the most. While the SEC has provided examples of what constitute factual business information, unfortunately, they have not provided much guidance on what does not constitute factual business information instead preferring to say that it depends on the facts and circumstances of a particular offering. However, under previous Compliance and Disclosure Interpretations (C&DIs), the SEC has specifically said that prohibited non-factual business information includes: “predictions, projections, forecasts or opinions with respect to valuation of a security, [and] information about past performance of the fund.” Thus, issuers have to be wary of including in their notices any information that could be interpreted as an opinion or a prediction of future performance. As long as the issuer sticks to factual information about the business, they should be fine.
Who Can Issuers Hire to Market Their Offerings?
Another thing that issuers need to watch out for is hiring promoters to go out and advertise their offering for them. Under Reg CF, issuers can hire promoters to advertise their offering so long as the promoter does so through channels provided by the Reg CF platform and the issuer takes reasonable steps to ensure that promoters disclose they are being compensated. There are two important things issuers have to be aware of. First, they can’t hire promoters to advertise outside of the platform unless those advertisements are limited to the same 3 types of information above. That means paying people to flood social media sites or to write articles about your offering with non-factual business information is a big no-no. Additionally, the burden is on the issuer to make sure promoters disclose they are being paid. However, the issuer just has to take reasonable steps to make sure. A reasonableness standard can be satisfied in a variety of ways, but I think if an issuer finds out their promoter is not disclosing their compensation, that could create a duty to correct. Regardless, if an issuer is paying people to promote their offering, they have to take extra steps to make sure their promoters are not doing something that could blow their offering.
Consequences for Violations
Once an issuer is found to have violated either the notice limitations or promoter limitations, it could open them up to quite a bit of liability. I previously touched on one possible outcome of an issuer blowing their Reg CF offering: rescission of the securities sold under the offering. Rescission would allow all investors who purchased securities under the offering the ability to sell their securities back to the issuer and could lead to what some experts have called a “permanent put” on the issuer. Other potential liabilities include civil suits by shareholders as well as SEC sanctions.
It’s clear that issuers who are conducting or thinking about conducting a Reg CF have a ton to worry about. Given that many of the issuers conducting Reg CF offerings are smaller startup companies it’s even more important that they understand exactly how and what they can do to market their offering. I may be somewhat pessimistic but I believe we will see issuers in the future being sanctioned, or face even worse penalties, for failing to abide by advertising and promoter restrictions under Reg CF.
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