SEC Releases Compliance and Disclosure Interpretations on Crowdfunding
The final rules implementing securities-based crowdfunding promulgated by the Securities and Exchange Commission (SEC) under Title III of the JOBS Act became effective on May 16, 2016. In anticipation of the long-awaited expansion of securities-based crowdfunding to all potential investors, including non-accredited "mom and pop" investors, the staff of the SEC’s Division of Corporation Finance recently addressed various issues in its Compliance and Disclosure Interpretations (C&DIs). The C&DIs provide helpful guidance for issuers, investors and intermediaries with respect to the following concepts as they relate to Regulation Crowdfunding:
- An issuer that has not filed a Form C (the form required to be filed by an issuer with the SEC prior to conducting a crowdfunding campaign) may only disseminate information that does not constitute an “offer” of securities. The C&DIs remind practitioners that the SEC has interpreted the term “offer” broadly. For example, factual business information may be distributed provided that it does not condition the public mind or arouse public interest in the offering. (Question 100.01)
- The investment limitations applicable to crowdfunding campaigns apply to all investors regardless of whether the investor is an individual or entity. When calculating the investment limitations for an entity, the limitations are based on the entity’s revenue and net assets as of its most recent fiscal year end. (Question 100.02)
- If an offering is conducted 120 days or less after the issuer’s first annual balance sheet date, a recently formed issuer may provide a balance sheet as of its inception date to comply with the disclosure requirements provided in Regulation Crowdfunding. (Question 201.01)
- An issuer may advertise the “terms of the offering” (i.e., the amount of the securities offered, the nature of the securities, the price of the securities and the closing date of the offering period) through communication channels other than the intermediary so long as such issuer abides by SEC Rule 204(b) of Regulation Crowdfunding. When the terms of the offering are not included in the issuer’s advertisement, the issuer is not restricted by such rules. Importantly, a third-party publication, such as a media article, may be subject to the limitations set forth in Rule 204(b) of Regulation Crowdfunding if the media article advertises the terms of the offering and the issuer is, directly or indirectly, involved in the preparation of the publication. (Questions 204.01, 204.03 and 204.04)
- An issuer is permitted to advertise the “terms of the offering” through a video advertisement provided that the issuer complies with the other rules applicable to advertisements (Rule 204(b)) of Regulation Crowdfunding. (Question 204.02)
- When an issuer compensates a third-party to promote the crowdfunding offering outside an intermediary’s communication channels, the third-party communications must comply with the notice requirements of Rule 204(b) of Regulation Crowdfunding. (Question 205.01)
Although C&DIs are not official rules or regulations, they do provide helpful interpretations and clarifications for parties involved in a crowdfunding campaign. A full version of the C&DIs can be found here.
We will continue to monitor additional guidance issued by the SEC as it relates to Regulation Crowdfunding and will issue client alerts as appropriate. For questions or further information, please contact Alexandria Kane (firstname.lastname@example.org; 212.631.4409), Lori Smith (email@example.com; 212.714.3075), Ryan Udell (firstname.lastname@example.org; 215.864.7152) or Michael Psathas (email@example.com; 212-868-4833).