A new reality streaming television series called Unicorn Hunters debuts tonight in which startups will pitch to a panel that includes Apple co-founder Steve Wozniak, and the panelists after some grilling of the entrepreneurs will make decisions on whether or not to invest, similar to Shark Tank. But unlike the couch potato viewers of Shark Tank, viewers of Unicorn Hunters will also be given the opportunity to invest in the presenting companies, which raises some pretty interesting securities law issues.
The securities offered on Unicorn Hunters will not be registered with the Securities and Exchange Commission, which means the companies, show sponsors and intermediaries will need to make sure the offerings satisfy the requirements of an exemption from registration and refrain from engaging in any activities prohibited thereby. In fact, Unicorn Hunters’ Fact Sheet states that all presenting companies will be engaging in side-by-side offerings under two different equity crowdfunding exemptions: Regulation Crowdfunding, which limits issuers to an aggregate offering amount of $5 million, and Rule 506(c) under Regulation D, in which only accredited investors may participate.
As for Regulation CF, the companies on Unicorn Hunters will benefit from recently promulgated significant reforms, which include an increase in the aggregate offering amount from $1.07 million to $5 million, change in the calculation of the investor cap from the lesser of to the greater of income and net worth, permission to test-the waters and self-certification for previously verified accredited investors.
But Reg CF also has strict rules governing how issuers may “advertise” the offering. A Reg CF offering must be conducted through one (and only one) online intermediary, either a registered broker-dealer or a platform satisfying the requirements of a “funding portal”. An issuer may communicate with investors and potential investors about the terms of the offering only through communication channels provided by the intermediary on the intermediary’s platform, provided that an issuer identifies itself as the issuer in all communications.
But what about communications outside the funding portal, such as what will take place on Unicorn Hunters? Under Reg CF, issuers are prohibited from advertising any of the terms of the offering outside the intermediary’s portal. Rather, communications outside the portal may only include a brief description of the business of the issuer, as well as the name of and link to the platform. This strict limitation on advertising outside the funding portal could be a significant regulatory risk for Unicorn Hunters’ presenting companies. If companies on Unicorn Hunters mention the terms of the offering on the show, they may be blowing their exemption under Reg CF. This probably explains why, unlike Shark Tank, there will be no negotiation of terms between the Unicorn Hunters panelists and the presenting companies. It remains to be seen whether the companies will say anything on air about the terms of their offering.
There is another potential trap in the Reg CF side of the Unicorn Hunter investment program, but this additional trap is one that will impact NetCapital, the registered funding portal through which all Reg CF Unicorn Hunters investments will be made. The potential trap is the individual investor cap. Each investor is limited as to how much he or she may invest in all Reg CF deals in any rolling 12-month period based on a formula that depends on an individual’s annual income and net worth. If either annual income or net worth are below $107,000, the investor’s aggregate investment in all Reg CF deals in any rolling 12-month period may not exceed the greater of $2,000 or five percent of the greater of annual income and net worth. If both annual income and net worth exceed $107,000, the cap is the greater of 10% or the greater of annual income and net worth with a hard cap of $100,000. The risk here is how to monitor individual investment caps on potentially thousands of investors, and that burden will fall on NetCapital because under Reg CF, it is the intermediary that is responsible for monitoring individual cap compliance. Thankfully, intermediaries are judged by a reasonableness standard: the intermediary must have a reasonable basis for believing that the investor satisfies the investment limitations, and in this regard an intermediary may rely on an investor’s representations concerning the investor’s annual income, net worth and the amount of the investor’s other investments made pursuant to Reg CF, unless the intermediary has reason to question the reliability of the representation. For example, the intermediary may be expected to be able to track all other Reg CF investments made by an individual on that intermediary’s platform, and if an investor has exceeded the cap just on that platform, it presumably would not be reasonable for the intermediary to rely on the individual’s representation that his aggregate Reg CF investments fall below the cap.
One last point here on Reg CF is that, ironically, among the recent crowdfunding reforms was that accredited investors are no longer subject to the Reg CF individual cap, yet Unicorn Hunters will steer accredited investors into the Rule 506(c) side of the offering and to the extent that occurs, companies won’t be able to benefit from that reform.
Recognizing that companies are capped at $5 million under Regulation CF, Unicorn Hunters is set up so that all companies are also conducting a simultaneous or side-by-side Rule 506(c) offering. Rule 506(c) allows issuers to use general solicitation to raise an unlimited amount, provided sales are made only to accredited investors and issuers use reasonable verification methods to determine accredited investor status. Unlike Reg CF, Rule 506(c) has no limitation on how investors are solicited or the content of any advertising. To maximize proceeds, companies appearing on Unicorn Hunters will try to include all investments from accredited investors in the Rule 506(c) side of the offering, which has no cap on the dollar amount raised. Furthermore, once a presenting company on the show reaches the $5 million limit from Reg CF investors, the company will only accept further investment from accredited investors and only under Rule 506(c). Nevertheless, not all accredited investors will be willing to provide the additional information or third-party certifications needed for verification as required under Rule 506(c). The Unicorn Hunters Fact Sheet states that its broker/dealer partners will be responsible for determining if proper validation of accredited investor status has been completed. Interestingly, Unicorn Hunters’ designated broker dealer for investments under Rule 506(c) is Livingston Securities, controlled by Scott Livingston, a Uniform Hunters panelist.
Self-styled as a new genre of “enrichtainment”, Unicorn Hunters will aim to combine entertainment with the drama of millions of viewing investors being given the opportunity to invest in growth companies with the chance, however remote, that one or more of these companies will become a unicorn. This is equity crowdfunding, and reality television is its newest frontier. But lurking beneath the entertainment aspect of the show are the complex rules that govern how unregistered securities may be offered to the public. Presenting companies will need to be mindful of the prohibition under Reg CF on discussing the terms of the offering on air (i.e., outside the permissible confines of the funding portal), and the intermediary will have a tall task monitoring individual investment limitations. I’m excited to see how this goes, and what exactly companies will be saying on air about their offering terms. All I can say at this point is: stay tuned!