Robb Mandelbaum has a nice piece up at Forbes that digs into the advertising limitations that are imposed by Regulation Crowdfunding. The whole piece is worth a read, and it sparked reactions in me in a couple of spots.
CEOs and founders of startups are likely to have lots of trouble with the rules. The impetus for the article was Mandelbaum’s realization that a prior piece on the newly effective Regulation Crowdfunding, a company founder put his crowdfunded offering at risk of violating Regulation Crowdfunding by even agreeing to talk to Mandelbaum about the offering. Indeed, the SEC’s C&DIs released May 16, 2016 state that a news story is subject to Regulation Crowdfunding’s advertising rules to the same extent as communications by the issuer if the issuer was directly or indirectly involved in the creation of the content. Many CEOs and journalists are likely not going to be aware of nuances of Regulation Crowdfunding’s advertising rules and may inadvertently violate them. We already run into this issue from time to time working on Rule 506(b) offerings, which do not permit any general solicitation. CEOs and founders of startups are successful in part because they are good at selling a company’s story, and when they have an opportunity to tell the press about all of the great things that are going on, they rightfully seize on it. But including discussions of the company’s ongoing fundraising that will allow it to do even more great things can be fatal to a Rule 506(b) offering. Crowdfunded offerings present an even greater risk – the Regulation D prohibition on general solicitation is a font of clarity compared to Regulation Crowdfunding’s advertising rules.
Mandelbaum’s piece includes a quote from Darren Marble, CEO of CrowdfundX, a digital advertising agency that has advised on the successful Elio Motors Regulation A+ offering:
“The best way to raise money for equity crowdfunding is to sell your vision, mission, and values,” says Marble. “It’s the story. Think about it: you have an unsophisticated investor, who maybe isn’t really an investor to begin with, but is now able to invest. The average American wants to invest in companies that they believe in and entrepreneurs who have the same world view as they do.”
I think Mr. Marble has effectively stated the case for why the SEC is so concerned with equity crowdfunding in the first place – unsophisticated investors may make emotional decisions based on slick sales pitches rather than decisions that are based on a more fulsome understanding of the risks inherent in the investment. The SEC wants investors to invest after reviewing information about the company’s history, capital structure, market and competitive position, financial history, sales data, debt load, litigation risk, and all of the other factors typically addressed in a full PPM through a funding portal; the SEC does not want investors to make the decision to invest based a professionally produced five minute marketing video delivered through Facebook.
I think the bottom line is that Regulation Crowdfunding suffers from a public misperception that has not been helped by the enthusiasm of its supporters. There is a perception that the SEC’s crowdfunding rules enable kickstartr type fundraising; there is a lack of understanding that, due to the numerous limitations and requirements of the rules, offerings under Regulation Crowdfunding are fundamentally different from what most people understand as “crowdfunding.”