By Frank Camp / Guest Column
So you need to raise money to build your dream company. You heard at a meetup that there are these things called “Reg D’s,” “private offerings” or “crowdfunding” that you can use to raise the cash you need to move your business to the next level. Should be simple, right? Just lay out your business case fairly on social media and collect the checks (or PayPal credits or Bitcoin).
“Not so fast,” says the Securities and Exchange Commission (SEC). “If you are going to sell securities (shares of stock, partnerships, or other interests in your company) and you aren’t planning on registering them with us, we have some restrictions.”
Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” Back in the day, the question of what was, or was not, a “public offering” was not always easy to answer. Since 1982, Rule 506(b), a rule under Regulation D, has provided conditions that an issuer – that’s your company – may rely on to meet the requirements of the Section 4(a)(2) exemption. One of these conditions was that an issuer must not use “general solicitation” to market the securities.
“General solicitation” includes advertisements published in newspapers and magazines, public websites, communications broadcast over television and radio and seminars where attendees have been invited by general solicitation or general advertising. Using a publicly available website also constitutes general solicitation.
Not all solicitations actually offer securities. To be restricted, the solicitation must be an “offer of securities” under the regs. You need to be careful though, because solicitations that “condition the market” (think: “I’m just trying to generate some buzz”) for an offering of securities may be considered to be an offer.
So how do you get the word out that you’d be willing to sell shares of your company?
Go to accredited investors
The 2012 Jumpstart Our Business Startups Act (“JOBS Act”) required the SEC to eliminate the prohibition on using general solicitation under Rule 506(c) where: all purchasers of the securities are “accredited investors;” the issuer takes reasonable steps to verify that the purchasers are accredited investors; and certain other conditions in Regulation D are satisfied. Who qualifies as an accredited investor and how to verify them are topics for another blog, but suffice to say, you need to be sure your investors know what they are doing.
Rule 506(b) remains unchanged following the adoption of Rule 506(c) and continues to be available for issuers that wish to conduct a Rule 506 offering without the use of general solicitation or that do not wish to limit sales of securities in the offering to accredited investors.
Think about crowdfunding
The JOBS Act included an exemption to permit securities-based crowdfunding and established the foundation for a regulatory structure for these transactions. It also created a new entity – a funding portal – and allows these internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.
The new SEC crowdfunding rules became effective May 16, 2016. The new rules allow an issuer to do a general solicitation and public advertising of a limited offering without restricting investors to accredited investors only.
Crowdfunding transactions by the issuer must meet specified requirements, including:
- The amount raised by the issuer must not exceed $1 million in a 12-month period;
- An individual’s investments in all crowdfunding issuers in a 12-month period are limited to:
- the greater of $2,000 or 5 percent of annual income or net worth, if annual income or net worth of the investor is less than $100,000
- 10 percent of annual income or net worth (not to exceed an amount sold of $100,000) if annual income or net worth of the investor is $100,000 or more.
- Transactions must be conducted through an intermediary that either is registered as a broker-dealer or is registered as a new type of entity called a “funding portal.”
- Issuers must file certain information with the commission and provide this information to investors and the intermediary facilitating the offering. Annual reporting is also required.
There’s a lot more to know before launching your own securities offering. Securities laws and the exemptions from registration are complicated. This column is for general information only, and is not intended to be, nor may it be taken as personal legal advice. Consult with qualified independent legal and accounting experts to make sure your company is complying with securities laws and regulations. For more information and resource links, visit the original blog post at http://bit.ly/NewBocrowdfund.
Frank Camp is the NewBoCo general counsel. He previously served as an in-house attorney for Transamerica focusing on IP, annuities, mutual funds and securities.