The staff of the SEC’s Division of Corporation Finance (Staff) recently issued guidance in the form of compliance and disclosure interpretations on the SEC’s crowdfunding rules, which took effect on May 16, 2016.1 Eligible issuers should consult with counsel to ensure all aspects of their offerings under the SEC’s crowdfunding rules are in compliance with the rules and the Staff’s guidance. This is especially important as it has been reported that the SEC is “giving special attention” to crowdfunding offerings.2
This client alert summarizes the Staff’s guidance on the SEC’s crowdfunding rules.
Prior to filing an offering statement on Form C with the SEC and providing it to the designated intermediary, an issuer may disseminate information not constituting an “offer” of securities. For example, factual business information that does not condition the public mind or arouse public interest in the issuer or a securities offering is not an offer and may be widely disseminated. The rules do not provide an exemption for the dissemination of information constituting an offer of securities prior to an issuer filing a Form C and providing it to the designated intermediary. As the SEC broadly interprets the term “offer,” eligible issuers should consult with counsel before disseminating any information or engaging in any media interviews or other third party publications to ensure they do not constitute a prohibited “offer.”
The rules’ investment limits apply to all investors, including non-natural persons. A non-natural person must calculate the investment limits based on its revenue and net assets as of its most recent fiscal year end rather than annual income and net worth like a natural person.
Financial Statement Disclosure
A recently formed issuer may choose to provide a balance sheet as of its inception date in its offering statement if the crowdfunding offering is conducted between inception and 120 days after reaching the first annual balance sheet date. The issuer must include a balance sheet as of a date during that period, which may be the inception date. If the balance sheet is dated as of inception, the statements of comprehensive income, cash flows and changes in stockholders’ equity are not applicable. For crowdfunding offerings conducted more than 120 days after the issuer’s first annual balance sheet date, the most recent annual balance sheet date determines the relevant period for which the issuer must provide statements of comprehensive income, cash flows and changes in stockholders’ equity.
Depending on its date of inception, an issuer with a December 31 fiscal year end commencing a crowdfunding offering in June 2016 would provide the following financial statements:
Click here to view table.
An issuer or persons acting on its behalf may only advertise the “terms of the offering” (i.e., the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period) in the manner permitted by the rules. An issuer (or persons acting on its behalf) may communicate with investors about the terms of the offering through communication channels provided on the intermediary’s platform if the issuer identifies itself (or persons acting on its behalf identify their affiliation with the issuer) in all such communications. Advertising the terms of the offering outside the intermediary’s communication channels is limited to notices (which may be in the form of a video) that direct investors to the intermediary’s platform and contain no more than the limited information permitted by the rules about the offering, the issuer and the intermediary. If an issuer compensates a third party to promote the issuer’s offering outside the intermediary’s communication channels, those third-party communications must also comply with the rules’ notice limitations.
The rules’ advertising limitations only apply when an issuer (or persons acting on its behalf) advertises any “terms of the offering.” Thus, if an advertisement does not include any “terms of the offering,” the issuer (or person acting on its behalf) is not limited to notices that include only the information allowed by the rules.
A third party publication (e.g., a media article) may constitute a notice subjecting an issuer to the rules’ advertising limitations. If the third party publication advertises the “terms of the offering” and the issuer has been directly or indirectly involved in the preparation of the publication, the article would be a notice subject to the rules’ advertising limitations. As the rules limit the information that may be in a notice, the issuer would likely find it difficult to comply with the rule’s requirements. If the media article does not advertise the “terms of the offering,” it would not be a notice subject to the rules’ advertising limitations, but could constitute an “offer” under the federal securities laws.