Like most legislation, Regulation Crowdfunding, aka Title III of the JOBS Act, was a compromise. The final bill and the subsequent rules written by the Securities & Exchange Commission attempted to balance competing views on the best way to increase access to capital for the nation’s small businesses while protecting investors.
One result of that compromise is the limited ability to advertise Title III offerings, despite their “public” nature. But companies may have more leeway than they think. From tombstones to offering terms, Scott Purcell of FundAmerica illuminates the rules that pertain to advertising a Title III offering.
The final Title III rules, on pages 139 & 432 under the discussion of “Prohibition on Advertising Terms of the Offering” say that only “tombstone ads” are permitted. Old securities professionals seem to lock in on that word and stop reading the new rules, thinking that this means ads are limited to small, bland, square 1975 era Wall Street Journal advertisements announcing new public offerings (see example below).
But this is, in fact, not the case for Title III, now known as the 4(a)(6) exemption to the Securities Act of 1933, aka “crowdfunding.”
What do the rules say?
An issuer shall “not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker.” Rule 204 of Regulation Crowdfunding allows an issuer to publish a notice advertising the terms of an offering in reliance on Section 4(a)(6) so long as the notice includes the address of, or a hyperlink to, the intermediary’s platform on which additional information about the issuer and the offering may be found. There are no limitations on how or where an issuer distributes (advertises) the notices.
THE BOTTOM LINE
Can a portal widely advertise an offering? No, probably not. It is likely to be viewed by regulators as a solicitation or recommendation by the portal (which is not permitted). They may have some very limited wiggle room in this, we’ll see as things get clearer.
Can an issuer widely advertise their offering? Yes, absolutely! So long as they stick to the rules and always direct investors to the portal to make their investment.
Some key points:
“Issuer” is the one doing the advertising, not the portal
“Terms of the offering” is very different than “existence/advertisement of the offering” – “terms” permitted in ads include any or all of the following: dollar amount offered, type of securities (e.g. convertible debt, preferred A equity, senior secured notes, etc.), price, and closing date.
“Advertising” means, like other aspects of the JOBS Act, ‘General Solicitation’ (aka, no restrictions on how or where you advertise an offering, whether online or offline, page 142, last paragraph)
So, what is a “notice”?
A notice (“advertisement”) may include any of, but no more than, the following:
- a statement that the issuer is conducting an offering
- the name of the portal through which the offering is being conducted
- a link to said portal
- the terms of the offering (cited above)
- factual information about the legal identity and business location of the issuer, limited to the issuers name, address, phone number, website and an e-mail address of a representative of the issuer
- a brief description of the business of the issuer
Ah, and this is where things get interesting! When I give demo’s of FundAmerica’s technology, it takes an hour to give someone a decent overview of our services, and a lot more if we want to get into details. And I’m sure your business is no different. So, would a 5-minute video about FundAmerica (or your company) that’s part of an offering advertisement posted on YouTube or Facebook or a random website be considered “a brief description” for purposes of the Rule? Sure.
What if the advertisement contained images, video or audio of customers using products? That’s fine, and certainly descriptive of the business. What about a seemingly extreme item, such as the advertisement containing statements that highlight intangible purposes of the company, such as a social cause? Definitely yes (see the last paragraph of page 141, where that is specifically cited). These examples are all within the “brief description” allowed by the rules as part of a notice (advertisement).
But…but…the rules say “Tombstone”!
Actually, they say “permitted notices should be similar to ‘tombstone ads’ under Securities Act Rule 134.” Note they say “similar” and not “exactly.” The SEC uses the word “tombstone” as a matter of convenience, not specific definition, and does a good job elaborating on exactly what is permitted in advertising a crowdfunding offering.
Even if it were exact (which it isn’t), what is a Rule 134 notice and when is it used?
Rule 134 allows issuers to make certain written communications regarding an offering after a Section 10 prospectus is filed. Rule 134 allows, in part:
- information about the securities
- a brief description of the business of the issuer
- a brief description of the intended use of proceeds
- the name, address, phone number and email address of the issuer
- the names of the underwriters in the syndicate
- an anticipated schedule for the offering
- whether, in the opinion of counsel, the securities are exempt from specified taxes, or the extent to which the issuer has agreed to pay any taxes with respect to the securities.
Can an issuer speak to an investor, or does the portal have to handle all communications?
Unless the portal is a registered broker-dealer, it should probably never speak to investors prior to an investment being made for fear that the conversation could be misconstrued as investment advice or a recommendation. Thus, yes, the issuer is the one who may often need to chat with investors pre-investment, and the SEC anticipated this in the rules. (Most portals with provide a communication forum to facilitate these communications)
Go for it! An issuer can create fantastic, full color advertisements to let the world know about their offering. They can include text, videos, audio, and pictures. They can be anywhere online or offline, and not just on the portal.
So get your team prepared to reach out to your crowd in whatever form, fashion or manner is best for your business to get funded. I’d suggest that you always have your lawyer take a look at ads before you use them (chances are the portal can’t do that for you, as regulators may interpret it as giving investment advice), and be sure to stick to the structure of the rules, especially in the requirement to direct investors to the portal in order to invest. Good luck!
Scott Purcell is the founder & CEO of FundAmerica, a company that provides escrow, clearing and compliance tools for crowdfinance portals. This article represents his personal opinions and is for informational purposes only and not for the purpose of providing legal or tax advice. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.