While the costs of preparing an offering under Reg CF are significantly lower than other types of securities offerings, they can still be expensive in terms of professional and marketing fees prior to having any sense of whether the offering will be successful. The SEC heard the complaints from issuers on this point and have adopted a testing the waters provision that is substantially similar to that used in Reg A.

Under new Rule 206, issuers contemplating an offering under Reg CF may make written or oral offers to test the waters (“TTW”) prior to filing a Form C. Once the Form C is filed, the offering is live and no more TTW can be done. There is no restriction on the content of TTW communications, as there are for solicitations after the Form C has been filed under Rule 204(b), however, any TTW must include a legend containing the following:

(1) That no money or other consideration is being solicited, and if sent in response, will not be accepted;

(2) That 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 through an intermediary’s platform; and

(3) That a person’s indication of interest involves no obligation or commitment of any kind.

Rule 206 also provides that the information that may be received by the issuer includes “name, address, telephone number, and/or email address” of any prospective investor. While the language is permissive, which would allow for additional information to be collected, such as pricing or other rights that prospective investors would want, this permissiveness would likely not extend to collection of payment information.

Issuers should note that any TTW materials used must be filed as part of the Form C under new Rule 201(z). This requirement is meant to ensure that all prospective investors gain access to the information that the issuer has made publicly available before the offering, as well as to provide a record of compliance with Rule 206.

Going forward, funding portals will need to evaluate whether any issuers have complied with Rule 206. If an issuer approaches a funding portal having already undertaken TTW without the required legend, the funding portal would likely have to deny access to that issuer for at least some period of time, because the issuer has not complied with the conditions of Reg CF, and thus violated Section 5 of the Securities Act. Likewise, an evaluation of whether all TTW materials have been included in the Form C is necessary. If not everything is included, then, again, the issuer has not complied with Reg CF and may be in violation of Section 5.

Further, TTW materials are still subject to the anti-fraud rules of federal and state securities laws. Misleading statements regarding projections, business plans, risks, financial condition, etc. during the TTW phase can still be a source of liability for an issuer and funding portal if the offering goes forward. These are certainly going to be matters that FINRA will be evaluating in funding portal compliance with Reg CF.

In its rulemaking, the SEC has also created a concept of “generic” TTW not tied to any particular type of exempt offering, which is new Rule 241. An issuer could use Rule 241 prior to a Reg CF offering, but would be wise to follow the filing requirements as if the TTW was conducted under Rule 206. We note that Rule 241 is unlikely to be used widely, since any such communications would be subject to state law, which is not preempted.

CrowdCheck, as a leading provider of due diligence, disclosure, and compliance solutions for online securities offerings, including crowdfunding, is ready to help you navigate compliance with the changes to Reg CF.


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Samson Williams Samson Williams 11/12/2020

So, its up to the platform to do the Due Diligence on whether Issuers comply with Testing The Water regs? 

This sounds expensive...

Sara Hanks Sara Hanks 11/15/2020

They'd need to do that as part of their other diligence obligations.