New C&DIs on Regulation Crowdfunding
On Friday the SEC released a new set of Compliance and Disclosure Interpretations on Regulation Crowdfunding ahead of the effective date of Regulation Crowdfunding on May 16. The C&DIs address issuer communications with the public, application of the investment limitations, and balance sheet and financial information disclosures for recently formed issuers. Here are the concepts clarified by the C&DIs:
- After a Form C has been filed and a crowdfunded offering has commenced, advertisements of the offering outside of the crowdfunding platform are limited to basic factual information about the offering and a link to the platform on which the offering is being conducted. The limitation on advertisements applies to third party content (such as media articles), too, if the content includes any of the terms of the offering and if the issuer was directly or indirectly involved in any way in the preparation of the content. The SEC notes that it would be difficult for an issuer to comply with the advertising rules in the context of a media publication. Translation: no media publications including terms of the offering during a crowdfunding offering.
- If the issuer has hired a third party to advertise the offering, the communications of that third party with the public outside of the crowdfunding platform must comply with Rule 204(b) to the same extent as if they were communications by the issuer itself.
- The SEC makes a distinction in the C&DIs between advertisements that include any of the “terms” of a crowdfunded offering (amount of securities offered, nature of the securities, price, and closing date) and those that do not include any of the terms of the offering. An advertisement that includes any terms of the offering is limited by Rule 204(b) in Regulation Crowdfunding. In contrast, an advertisement that takes place during a crowdfunded offering but does not include any of the terms of the offering is NOT subject to Rule 204(b), but it remains subject to general securities law prohibitions on public offerings of securities (more on that below).
- Issuer advertisements of a crowdfunded offering could be in the form of a video, but the content limitations of Rule 204(b) would still apply.
- The C&DIs clarify that, prior to the filing of a Form C, issuer communications with the public are only restricted by the general requirement that the issuer cannot make an “offer” of securities. The C&DIs remind us that the SEC interprets the term “offer” very broadly and that statements made in advance of an offering that tend to condition the public mind or raise interest in the issuer constitute an offer. In other words, prior to filing a Form C issuers (and their officers and directors) need to be careful what they say to the general public and the media regarding the Company in order to avoid inadvertently making an offer.
- The investment limitations apply to entities as well as natural person investors. With entities, the limits should be calculated based on the entity’s revenue and net assets as of its most recently completed fiscal year.
- For a recently formed issuer that has not completed an annual balance sheet cycles, the issuer is permitted to provide a balance sheet as of inception. The C&DIs also include a table with example inception dates to illustrate the concept.
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