Since the Regulation A+ effective date last month, a number of websites have emerged that promote “Regulation A+ crowdfunding” contributing even further to the confusion in the market regarding “crowdfunding.”
Colloquially perhaps any attempt to raise capital through the use of an internet-based platform may be thought of as crowdfunding; however, to a securities lawyer, this usage of the term “crowdfunding” may be misleading.
Title III of the JOBS Act establishes a securities offering exemption for “crowdfunding” (some refer to this as Title III crowdfunding or refer to the new exemption, Section 4(a)(6)), which is available only to certain issuers, and only to raise up to a specified amount of proceeds ($1 million in a twelve-month period). A Title III crowdfunded offering must be made through a registered broker-dealer or a funding portal. The SEC has proposed rules for Title III crowdfunding that, among other things, limit advertising and marketing of such offers, prescribe certain disclosure requirements, impose limited ongoing disclosure requirements, and mandate that certain investor educational materials be prepared and disseminated. At present, Title III crowdfunding is not available to issuers. The SEC must release final rules. As we have commented on in prior posts, a number of states have moved forward and have adopted crowdfunding exemptions for intrastate offers.
Title II of the JOBS Act required that the SEC relax the prohibition against general solicitation for certain Rule 506 offerings, and the SEC adopted final rules to do so. In a Rule 506(c) offering, an issuer may use general solicitation to identify potential investors; provided that investors are verified to be “accredited investors.” If an issuer enlists the services of a financial intermediary to assist with the offering and the intermediary receives transaction-based compensation, the intermediary generally will be required to be a registered broker-dealer.
Title II also provided greater certainty regarding the activities that a “matchmaking” portal may conduct without being subject to the requirement to register as a “broker-dealer.” Matchmaking platforms that rely on Rule 506(c) or that, alternatively, rely on pre-JOBS Act no-action letter guidance to make offers to investors with whom a pre-existing substantive relationship has been established and who are determined to be accredited investors prior to any offers being made, may engage in “accredited investor crowdfunding.”
The final rules relating to Regulation A+ permit issuers to “test the waters” subject to compliance with a number of requirements. Certainly, an issuer that is contemplating a Regulation A+ offering may use internet-based communications to test the waters. However, the final rules for a Regulation A+ offering have little in common with the proposed rules implementing Title III crowdfunding and, also, little to do with “accredited investor crowdfunding.” To the extent that offers are made using an internet-based platform and the intermediary expects to receive transaction-based compensation, it generally will be required to be a registered broker-dealer. The Regulation A+ framework is complex, and requires the preparation of, and review by, the SEC of a disclosure document. In addition, any “test the waters” materials used after an offering is qualified will need to be updated and filed with the SEC. The issuer will be required to comply with the investor limitation for individuals. Issuers considering using a platform should take care to ensure that they will be able to comply fully with applicable regulations.