Recent Developments for Intrastate Crowdfunding and Social Media Use

by Smith Anderson
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In June 2013, the N.C. House of Representatives approved HB 680, the Jumpstart Our Business Startups Act (NC JOBS Act) by an overwhelming bipartisan vote of 103-1. Designed to utilize the “intrastate offering” exemption found in Section 3(a)(11)[1] of the Securities Act of 1933, as amended (the Securities Act), the bill proposes a registration exemption that enables crowdfunding as a new type of financing for North Carolina businesses. Although the NC JOBS Act did not pass committee review in the N.C. Senate during the 2013 long session, it remains up for consideration in the 2014 short session that began in May 2014. Supporters of the bill are confident that it will move through the Senate and to the Governor’s desk this summer. If all goes as expected, N.C. companies and investors should be able to take advantage of the NC JOBS Act before the end of the year.[2] If enacted, North Carolina would be the ninth state to enact this type of “intrastate crowdfunding” exemption, joining Kansas, Georgia, Michigan, Wisconsin, Washington, Indiana, Maine, and Alabama. Legislation is also pending in New Jersey, Florida and Texas, with a number of other states in various stages of planning for such an exemption. Go to http://jobsnc.blogspot.com/ to track the status of this legislation. 

SEC Building Walls Around States Online to Preserve Integrity of the Intrastate Offering Exemption

Unfortunately, recent guidance issued by the staff of the Division of Corporation Finance (the Staff) of the Securities and Exchange Commission (SEC) may temper some of the excitement around these new “intrastate crowdfunding” developments. In April, the Staff posted three compliance and disclosure interpretations (C&DIs) discussing intrastate offerings under Section 3(a)(11) and Rule 147[3] under the Securities Act and the Internet. 

While not expressly stated in any of the guidance, reading between the lines, we begin to see the SEC’s growing concern with how the use of the Internet and social media to conduct intrastate offerings will reach out-of-state individuals. 

The Staff updated previously released C&DI 141.03 to reiterate its position that an issuer may use general solicitation in an intrastate offering, but such solicitation must be made only to persons resident within the state where the issuer is a resident. In new C&DI 141.04, the Staff stated that companies can use a third-party Internet portal to promote an intrastate offering as allowed by a state crowdfunding statute if the portal implements specific measures to ensure that offers of securities are made only to persons resident in the relevant state or territory. These measures include the use of disclaimers and legends to notify potential investors of the restrictions and actually limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state. But in C&DI 141.05, the Staff took a more narrow position for issuers hoping to avoid the use of an intermediary. The Staff cautioned that whether a communication is an offer depends on the specific facts and circumstances, but due to the “broad, indiscriminate” manner an issuer’s existing website or social media presence are often used, an issuer using these mediums to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer does business. 

Compliance with either of these C&DIs will require careful planning and well-crafted policies on the part of the issuer and third-party platforms to ensure the offering qualifies for the federal intrastate exemption. Further, the guidance under C&DI 141.05 means that any issuer that is interested in conducting an intrastate crowdfunding offering without involving an intermediary will need to exercise extreme caution to ensure that its offers do not cross jurisdictional borders given the uncertain boundaries of the new facts and circumstances test.

New Guidance on Securities Laws and Social Media Use

On a more helpful note, in mid-April the Staff issued five new C&DIs clarifying its position on using hyperlinks in order to satisfy legending and other informational requirements under the Securities Act and on an issuer’s responsibility for an electronic communication that is retransmitted by a third-party who is not an offering participant.

Hyperlinks Will Satisfy Requirements under Certain Conditions

In three new C&DIs (110.01, 164.02 and 232.15), the Staff states that it will not object to the use of a hyperlink to satisfy the legending and other informational requirements that apply to permitted communications under Rule 134, Rule 165 and Rule 433[4] under the Securities Act, as long as: 

  1. The platform through which the communication is distributed has technical limitations on the number of characters or amount of text that may be included;
  2. Including the required statements in their entirety, together with the other information, causes the communication to exceed the limit on the number of characters or amount of text; and
  3. The communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication through the relevant platform could include the required legend or other information while staying within the character or text limit, the use of a hyperlink to the required statements would not be appropriate.

Is the Original Tweeter Responsible for a Retweet?

In new C&DIs 110.02 and 232.16, the Staff poses the question whether an issuer that has distributed a communication in compliance with Rule 134 or Rule 433 must ensure continued compliance of any retransmission of its communication by a third-party who is not an offering participant. The Staff’s answer to this question is no. The retransmission would not be attributable to the issuer if both:

  1. The third-party is neither an offering participant nor acting on behalf of the issuer or an offering participant; and
  2. The issuer has no involvement in the retransmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433.

The Staff reiterated a past interpretation that an initial communication prepared and distributed by a third-party not involved in the offering could still be attributed to an issuer if the issuer or another offering participant was involved in its preparation or explicitly or implicitly endorsed or approved the information.

Regardless of this new guidance, issuers and other offering participants must still be vigilant in crafting and reviewing social media communications, especially given such communications are still subject to the federal securities anti-fraud provisions.

[1] Section 3(a)(11) provides an exemption from the registration requirements of the Securities Act for any security offered and sold only to persons who reside in a single state or territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such state or territory.

[2] The N.C. securities division will need to adopt rules and regulations to implement the NC JOBS Act, which will cause some delay once the bill is enacted. 

[3] Rule 147, the safe harbor for offerings conducted pursuant to Section 3(a)(11), stipulates among other things that an offering may not be offered or sold to nonresidents of the state in which the issuer is a resident and conducting its business.

[4] These rules govern permissible public announcements by an issuer during a registered public offering of its securities, each requiring the issuer to include certain legends and other information depending upon the category of the issuer and status of the registration statement.

 

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.

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