The SEC Needs To Fix Its Intrastate Crowdfunding Guidance

On April 10, 2014, the SEC issued Compliance and Disclosure Interpretations (“C&DIs”) on intrastate crowdfunding offerings. The guidance was overly restrictive, and risks really hurting intrastate crowdfunding just as it is getting going.

Here is what the SEC said:

Question: An issuer plans to use a third-party Internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable securities crowdfunding within that state. Assuming the issuer met the other conditions of Rule 147, could it rely on Rule 147 for an exemption from Securities Act registration for the offering, or would use of an Internet portal necessarily entail making offers to persons outside the relevant state or territory?

Answer: Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory. In the context of an offering conducted in accordance with state crowdfunding requirements, such measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address). Of course, any issuer seeking to rely on Rule 147 for the offering also would have to meet all the other conditions of Rule 147. [April 10, 2014]

http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#141-04

Then the SEC went on to say this:

Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147?

Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad, indiscriminate manner. Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business. [April 10, 2014]

http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#141-05

What this advice means is that intrastate crowdfunding offerings won’t be able to use the Internet as it is typically used to advertise their offerings. Offerings will have to be hidden behind walled gardens, only viewable by those persons who verify that they are residents of a particular state.

As a practical matter, this is going to make intrastate crowdfunding more difficult than it needs to be.

A cynic would look at this and say:

  1. Gee, the SEC can’t get the job done on its own crowdfunding regulations
  2. States, the great laboratories of experiment, are going ahead on their own
  3. But now the SEC wants to ruin it for them as well.

I am not a cynic. I just think we need better law. And here is where our elected officials can come into play. If you have the chance to talk to any of them, ask them to instruct the SEC to fix the above guidance. The SEC has it within its authority to change the above. Legends and confirmation of residency prior to investment ought to be enough.

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  • lunarmobiscuit

    The unanswered question that this article needs answered is a clear definition of a solicitation. If I tweet, “NewCo is raising money — new.co/invest” is NewCo soliciting? How about “Check out NewCo — new.co/invest”? What about “New.co? – new.co”?

    Back in thy physical world, if I live in Vancouver, WA, and buy an ad in the local paper touting my intra-state offering, am I similarly expected to ensure no one from Portland, OR is reading that paper? How about Blaine, WA and Canadians, or Skokane and Idahoans?

  • http://startuplawblog.com/joewallin Joe Wallin

    Great questions Luni. The SEC hasn’t defined what constitutes general solicitation or general advertising. But it has provided examples. A conservative way to think about it–how did the investor come to learn about the investment opportunity? Through a personal connection? Or through the media?