10 Minute Overview Of General Solicitation And Crowdfunding

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact

On August 19, Nicole Strydom and I gave a 10 minute presentation on the general solicitation rules and the current status of “crowdfunding” at a ceremony to announce the finalists in the student division of the Minnesota Cup.  This summary of our presentation provides brief overview of the new rules on general solicitation and the forthcoming rules on crowdfunding.

Distinction between General Solicitation and Crowdfunding

  • For SEC purposes, general solicitation and crowdfunding are two distinct concepts, although in common parlance they are closely related.  For example, you may think that crowdfunding by definition must include dissemination of advertisements or information to the masses.  For purposes of the securities laws, though, crowdfunding has nothing to do with general solicitation.

General Solicitation and Rule 506(c)

  • New SEC Rule 506(c), which allows (for the first time since the Securities Act was enacted in 1933) issuers to publicly advertise unregistered offerings of securities conducted pursuant to Regulation D.
  • The new rule doesn’t replace the status quo – the “traditional” Rule 506 offering to only accredited investors and up to 35 non-accredited investors is still available (although it has been renumbered Rule 506(b)).
  • Rule 506(c) provides a new exemption for sales of securities that specifically allows for advertising, but there are a few caveats to keep in mind:
    • Although advertising using virtually any media is permitted, the existing anti-fraud provisions still apply – so any untrue statement of a material fact or omission of a material fact can still subject an issuer to liability, which may be problematic when an issuer is trying to describe an offering in the context of an advertisement (or, say, a 140 character tweet).
    • In an advertised offering under Rule 506(c), investments can only be accepted from accredited investors – the ability to accept up to 35 non-accredited investors is not available for a Rule 506(c) offering. 
    • In an advertised offering, the issuer is responsible for verifying the status of the accredited investors.  In a plain vanilla Rule 506 offering, the issuer typically requires the investor to self-certify that they are an accredited investor.  While that will continue to suffice for purposes of Rule 506(b), it will not be enough in advertised offerings under Rule 506(c).  The specific steps required by an issue to verify accredited investor status will vary under the circumstances (e.g., widely advertised offerings with low minimum investments require more verification that selectively advertised offerings with high minimum investments).  The SEC has established four methods of verification will be deemed to satisfy the issuer obligation, and those safe harbors are described in Rule 506(c).
  • The new general solicitation rule has triggered a number of additional rule proposals from the SEC, including new rules or changes to existing rules that would require:
    • That issuers file the required Form D with the SEC 15 days in advance of the first use of general solicitation for the offering.  Currently, the requirement is that the Form D be filed within 15 days after the date of the first sale in the offering.
    • That issuers must include a legend on any written advertisement that informs people, among other things, that only accredited investors may invest and that investors have to be able to bear the loss of their investment.
    • That issuers must submit any written advertising material to the SEC no later than the first day the materials are used.

Crowdfunding

  • The first thing to note about crowdfunding is that it isn’t yet a permissible way to raise money in an unregistered offering – the rules that will implement the crowdfunding provisions of the JOBS Act have not yet been finalized.
  • An offering pursuant to the forthcoming crowdfunding rules may not make use of advertising, other than to direct the prospective investor to visit the funding portal for the offering.  This is somewhat counterintuitive, since the everyday use of the term crowdfunding almost necessarily implies widespread advertising.
  • If an issuer takes part in a crowdfunding offering, it will be limited to raising $1 million in a rolling 12 month period from that particular offering or any other offering, even other non-crowdfunded offerings.
  • In a crowdfunding offering, there are limitations on the amount that the issuer can accept from any investor in a rolling 12 month period.  Specifically, if the investor has an annual income or net worth of less than $100,000, the issuer can only accept up to the greater of $2,000 or 5% of the investor’s income.  If the investor has an annual income or net worth greater than $100,000, the issuer can accept up to 10% of the investor’s annual income, with a maximum of $100,000.
  • In a crowdfunding offering, only broker-dealers or a new type of regulated entity called a funding portal can conduct an offering.  This funding portal isn’t allowed to offer investment advice, solicit sales, pay compensation based on sales or handle investor funds.  What can it do?  It can help match investors with issuers.  Funding portals will also be required to register with the SEC and FINRA and comply with appropriate rules of each regulatory body.
  • Issuers who want to use the crowdfunding exemption will need to file certain financial information with the SEC – including a description of the financial condition of the issuer.  Issuers will also need to provide this information to its broker-dealer or funding portal and to potential investors.  The amount of financial information the issuer will have to provide depends on the target offering amount.  For example, if targeted offering amount is greater than $500,000, the issuer will need to provide audited financial statements, but if it’s $100,000 or less, the issuer will just need to provide its income tax return for the most recently completed fiscal year, as certified by the issuer’s principal executive officer.

Conclusion

  • There are lots of exciting opportunities for growing businesses as a result of the new Rule 506(c), which will allow for advertising in connection with private offerings, and the forthcoming crowdfunding rules, which will permit companies to raise money from non-accredited investor.  However, there are also many caveats and pitfalls – not all of them discussed here – and kinks in the system that will need to be worked out.  As a result, companies should involve their securities lawyers as early in the financing process as possible.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact
more
less

Stinson Leonard Street - Dodd-Frank and the Jobs Act on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.