If you are contemplating raising equity finance by offering shares in your company on a crowdfunding platform you will no doubt have considered, or been advised to consider, the regulatory financial promotion rules. However, this regulatory analysis may not automatically take into account the restrictions that apply to the marketing of shares under the Companies Act 2006 (CA 2006), in particular the restriction on "offers to the public" under section 755 CA 2006.
In this context, the FCA's publication of 'interim feedback to the call for input to the post-implementation review of the FCA’s crowdfunding rules' (Feedback Statement 16/13) serves as a helpful reminder of the rules on crowdfunding; particularly as those rules relate to investment-based crowdfunding.
What you probably already know – financial promotion and Prospectus Directive rules
Financial promotion of non-readily realisable securities (NRRS) to retail investors and the Prospectus Directive – in particular the conditions for "direct-offer financial promotions" – are well-trodden ground, so we’re not going to cover the regime in detail here. See COBS 4.7 for more detail on this.
The part you may not have considered – section 755 CA 2006
Section 755 CA 2006 provides that "a private company limited by shares or limited by guarantee and having a share capital must not; (a) offer to the public any securities of the company, or (b) allot or agree to allot any securities of the company with a view to their being offered to the public.'"
There is little legislative guidance on 'offers to the public'. So, if the structure and terms of listings on crowdfunding platforms aren't carefully considered it is all too easy for the section 755 CA 2006 requirement to be breached. Such a breach could ultimately raise grounds for a court order (i) requiring the company to re-register as a public company, (ii) for the compulsory winding up of the company or, (iii) requiring the company to reverse the public offering by purchasing back the securities.
Private crowdfunding companies hoping to avoid this restriction (and the potential ramifications) should look to utilise the exemption in section 756(3)(a) CA 2006, which reads:
"an offer is not regarded as an offer to the public if it can properly be regarded, in all the circumstances, as: not being calculated to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer".
Practically speaking, it is arguable that if the crowdfunding platform requires investors first to sign up to the platform and go through a process of confirming that they can invest in NRRS then, as long as there is a very definite 'fire break' between that process and the ability of the investor to invest in any of the offers made on that platform, then because of the voluntary nature of the registration any targeted offering made only to those registered users/investors may not be considered an offer to the public at large.
However, an 'offer to the public' can include 'any section of the public, however selected' and so as crowdfunding continues to flourish and user bases grow ever bigger, it is likely that the utility of this argument will diminish and crowdfunding platforms will need to consider alternative structures to mitigate the risk of breaching the section 755 CA 2006 restriction.
Furthermore, an issue is likely to arise in situations where a crowdfunding platform allows shares to be transferable as this could be said to mean that the offer could arguably be regarded, in all the circumstances, as 'calculated to result' indirectly in securities becoming available to persons other than those receiving the offer.
Another option for a crowdfunding private company is to convert to a PLC. For example, Brewdog has specifically converted to PLC status to avoid falling foul of this restriction. However, this is considered to be a less attractive option because of the additional PLC requirements (including, in this context, the need to obtain the approvals envisaged under the Takeover Code), even if in reality for many crowdfunding companies this may actually not be so burdensome.
The FCA's view
In a previous policy report, the FCA has made it clear that the new 2014 rules would not affect or limit the applicability of the Companies Act restriction of offers of private company shares to the public and that companies seeking to raise finance by issuing equity are still responsible for complying with this legislation.
The FCA has actively encouraged innovation in this sector but has made it clear that this should not be at the expense of applicable legislation. Crowdfunding platforms will not be able to avoid this complex issue and must make sure that there are precautionary systems and controls in place to avoid being in breach.