The idea behind crowdfunding is that the crowd — family, friends and fans of a small or startup company, even if they are not rich or experienced investors — can invest in that company’s securities. For a traditionally risk-averse area of law, that’s a pretty revolutionary concept.
In order to make this leap, Congress wanted to ensure that all potential investors had access to the same information. The solution that Congress came up in the JOBS Act with was that there had to be one centralized place that an investor could access that information — the website of the funding portal or broker-dealer that hosts the crowdfunding offering (going forward we will refer to both of these as “platforms”).
This means (with some very limited exceptions that we’ll describe below) most communications about the offering can ONLY be found on the platform. On the platform, the company can use any form of communication it likes, and can give as much information as it likes (so long as it’s not misleading). Remember that the platforms are required to have a communication channel — basically a chat or Q&A function — a place where you can discuss the offering with investors and potential investors (though you must identify yourself). That gives you the ability to control much of your message.
So with that background in mind, we wanted to go through what you can and cannot do regarding communications prior to and during the offering. Unfortunately, there are a lot of limitations. Securities law is a highly regulated area and this is not like doing a Kickstarter campaign, or regular advertising for your products or services. Also, bear in mind this is a changing regulatory environment. We put together this guide based on existing law, the SEC’s interpretations that it put out on May 13, 2016 and numerous conversations with the SEC Staff. As the industry develops further, the Staff’s positions may evolve.
We do understand that the restrictions are in many cases counter-intuitive and don’t reflect the way people communicate these days. The problems derive from the wording of the statute as passed by Congress. The JOBS Act crowdfunding provisions are pretty stringent with respect to publicity; the SEC has “interpreted” those provisions as much as possible to give startups and small businesses more flexibility.
What you can say before you launch your offering
US securities laws regulate both “offers” and sales of securities; whenever you make an offer or sale of securities, that offer or sale must comply with the SEC’s rules. The SEC interprets the term “offer” very broadly and it can include activity that “conditions the market” for the offering. “Conditioning the market” is any activity that raises public interest in your company, and could include suddenly heightened levels of advertising, although regular product and service information or advertising is ok (see discussion below).
Under new rules which went into effect on March 15, 2021, companies considering making a crowdfunding offering may “test the waters” (TTW) in order to decide whether to commit to the time and 2 expense of making an offering.1 Prior to filing the Form C with the SEC, you may make oral or written communications to find out whether investors might be interested in investing in your offering. The way in which you make these communications (e.g., email, Insta, posting on a crowdfunding portal site) and the content of those communications are not limited, but the communications must state that:
- No money or other consideration is being solicited, and if sent in response, will not be accepted;
- No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only though the platform of an intermediary (funding portal or broker-dealer); and
- A person’s indication of interest includes no obligation or commitment of any kind.
You can collect indications of interest from potential investors including name, address, phone number and/or email address. The rule does not address getting any further information, such as the manner of any potential payment. If you do make TTW communications, you must file any written communication or broadcast script as an exhibit to your Form C. And TTW communications are subject to the regular provisions of securities law that impose liability for misleading statements.
Before the point at which you file your Form C with the SEC, the TTW process is the only way you can make any offers of securities, either publicly or privately. This would apply to meetings with potential investors, giving out any information on forums which offer “sneak peeks” or “first looks” at your offering, and public announcements about the offering. Discussions at a conference or a demo day about your intentions to do a crowdfunding offering must comply with the TTW rules and you should read out the information in the bullets above.
Compliance with the TTW rules is essential for being able to go forward with an offering under Regulation CF. Any non-compliant communication made prior to filing the Form C may be construed as an unregistered offer of securities made in violation of Section 5 of the Securities Act — a “Bad Act” that will prevent you from being able to use Regulation CF, Rule 506, or Regulation A in the future. Even if a regulator has not come knocking on your door, any responsible funding portal or broker-dealer will avoid posting your offering if there were non-compliant communications prior to the filing of the Form C.
Normal advertising of your product or service is permitted as the SEC knows you have a business to run. However, if just before the offering all of a sudden you produce five times the amount of advertising that you had previously done, the SEC might wonder whether you were doing this to stir up interest in investing in your company. If you plan to change your marketing around the time of your offering (or if you are launching your company at the same time as your CF offering, which often happens), it would be prudent to discuss this with your counsel so that you can confirm that your advertising is consistent with the SEC’s rules.
Genuine conversations with friends or family about what you are planning to do and getting their help and input on your offering and how to structure it, are ok, even if those people invest later. You can’t be pitching to them as investors, though, except in compliance with the TTW rules
What can you say after you launch?
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