This is a guest post by Mark Graffagnini of Graffagnini & Assosciates.
On August 29, 2012, the SEC released its first set of rules clarifying what companies can do regarding “crowdfunding.” Under the proposed rules, which are mandated by the Jumpstart Our Business Startups (“JOBS”) Act, companies would be permitted to use general solicitation and general advertising to offer securities under the securities rules. What does this mean?
Generally, a company raising angel or venture capital cannot raise money by means of a “general solicitation” or general advertising campaign. Under current law, you cannot send an email blast out to potential investors or post a facebook status update offering to sell a piece of investors to the general public. Examples of general solicitation and general advertising include advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars whose attendees have been invited by general solicitation or general advertising. Other examples include posting ads on unrestricted websites (yes, that would include yours if accessible by anyone).
Under the proposed rules, companies may use general advertisements and general solicitations to seek investment, but there are certain conditions. These conditions are as follows:
- the issuer must take “reasonable steps” to verify that investors are “accredited investors”;
- all investors actually are accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they do, at the time of the sale of the securities; and
- certain other standard securities rules are met.
As you might have guessed, the biggest impact of the proposed changes revolves around the “reasonable steps” to ensure that investors are accredited. Of course, the SEC has only stated that this will be an objective determination based on the facts and circumstances of the transaction. So, it will be up to the company and their lawyer to help conduct the offering in a manner that complies with the rules if the company wants to use a general solicitation or crowdfunding. Some of the factors the SEC will look at include
- the nature of the investor and the type of accredited investor that the investor claims to be;
- the amount and type of information that the company has about the investor; and
- the nature of the offering, such as the manner in which the investor was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
The SEC did state that if your company solicits investors through a website accessible to the general public or through a widely disseminated email or social media solicitation would likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party, such as a registered broker-dealer. So, you are more likely to be in compliance if you solicit through
a crowdfunding site that pre-screens investors rather than a general ad campaign. For a comparative list of crowdfunding sites, see here.
Stay tuned for more updates as the SEC finalizes the new crowdfunding rules!