BizTech Law Blog

The SEC Crowdfunding Proposed Regulations: Issuer Advertising, Promoter Compensation & Topics Omitted

Issuer Advertising. Because of restrictive language in the JOBS Act, the SEC's proposed crowdfunding regulations impose significant restrictions on the issuer's ability to advertise the offering. (The "issuer" is the company raising capital.) Any advertisement, other than an advertisement posted on the intermediary platform, whether provided in an e-mail blast, published on the issuer's or a third party's website, posted on a social media site, published in print media, or broadcast on television or radio, must direct prospective investors to the intermediary's platform and cannot include anything other than the following information:

• A statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, the name of the intermediary, and a link to the intermediary's platform.
• The terms of the offering; i.e., the amount of securities offered, the nature of the securities, the price at which the securities are offered, and the closing date of the offering period.
• The name, address, phone number and website URL of the issuer.
• A brief description of the issuer's business.
• The e-mail address of a representative of the issuer.

The issuer may, however, communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary's platform, so long as the issuer identifies itself as the issuer. The proposed crowdfunding regulations do not restrict issuer communications other than those that refer to the terms of the offering.

Promoter Compensation. An issuer is allowed to compensate a person to promote the issuer's offering through communication channels provided by the intermediary on the intermediary's platform. But in order to do so legally, as a part of the promotional communication, the promoter must disclose the receipt, past or prospective, of the compensation received or to be received from the issuer.

In addition, a founder or employee of the issuer who engages in promotional communications through the intermediary's platform must clearly disclose with each posting that he or she is acting on behalf of the issuer. An issuer may not have its employees engage in promotional activity that looks as though it is coming from John Q. Public.

Topics Omitted. It is worth noting that there are a few areas for which the SEC considered adding regulations, but decided not to. Specifically:

• Oversubscriptions are not explicitly permitted or prohibited. Rather the proposed regulations simply require the issuer to disclose how much it would accept in oversubscriptions, how oversubscriptions would be allocated, and how the additional funds would be used. Hence oversubscriptions are implicitly permitted, subject, of course, to the $1 million annual limitation.
• No fixed price is required and dynamic pricing (such as pricing per share that increases with the passage of time) is not prohibited. All that is required is that the method for determining price be disclosed.
• No limit is imposed on the type of securities that may be offered. As a result, debt securities may be offered and sold in crowdfunding transactions. The SEC believes that an appropriate exemption from the Trust Indenture Act is already available, and is not proposing to add another exemption specific to crowdfunded offerings.
• The SEC is not proposing to require any specific method of valuing the offered securities.

This article concludes our series of articles that address the requirements imposed on issuers in the SEC's proposed crowdfunding rules. Our next series of articles will address the proposed requirements for intermediaries.

Please contact Iris Linder (517-371-8127 or ilinder@fosterswift.com) for more information.

Categories: Crowdfunding, Venture Capital/Funding