May 16, 2016 is the day many of us have been waiting for! Regulation Crowdfunding goes live. Hopefully everything goes smoothly for my clients listing on portals.
On Friday, May 13, 2016, the SEC released new Compliance and Disclosure Interpretations (“C&DIs”) regarding Regulation Crowdfunding.
Rule 100: Crowdfunding exemption and requirements
Question: What information can an issuer disseminate prior to filing the Form C with the Commission and providing it to the relevant intermediary?
Answer: Information not constituting an offer of securities may be disseminated by an issuer prior to the commencement of a Regulation Crowdfunding offering. For example, factual business information that does not condition the public mind or arouse public interest in a securities offering is not an offer and may be disseminated widely. The Commission has interpreted the term “offer” broadly and has explained that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer…” Securities Offering Reform, Release No. 33-8591 (July 19, 2005). See also Securities Act Rule 169 and Securities Act Rule C&DI 256.25. Regulation Crowdfunding, however, does not provide an exemption for the dissemination of information that constitutes an offer of securities by an issuer prior to the issuer filing a Form C with the Commission and providing it to the relevant intermediary. [May 13, 2016]
Question: Are non-natural persons that invest in Regulation Crowdfunding offerings subject to investment limits?
Answer: Yes. The investment limits in Rule 100(a)(2) of Regulation Crowdfunding apply to all investors. Instead of calculating investment limits based on annual income and net worth, a non-natural person calculates the limits based on its revenue and net assets (as of its most recent fiscal year end). [May 13, 2016]
Rule 201: Disclosure Requirements
Question: May a recently formed issuer choose to provide a balance sheet as of its inception date?
Answer: Yes, if the offering is conducted during the period from inception until 120 days after reaching the annual balance sheet date for the first time, the issuer must include a balance sheet as of a date in that period, which may be inception date. When the balance sheet is dated as of inception the statements of comprehensive income, cash flows and changes in stockholders’ equity will not be applicable. For an offering conducted more than 120 days after the issuer’s first annual balance sheet date, the date of the most recent annual balance sheet determines the period for which statements of comprehensive income, cash flows and changes in stockholders’ equity must be provided. For example, depending on its date of inception, an issuer with a December 31 fiscal year end that starts a Regulation Crowdfunding offering in June 2016 would provide financial statements as follows:
|Date of Inception||Balance Sheet||Other Financial Statements|
|May 2016||As of inception||Not applicable|
|May 2015||As of December 31, 2015||For the period from inception to December 31, 2015|
|May 2014||As of December 31, 2015 and 2014||For the year ended December 31, 2015 and the period from inception to December 31, 2014|
[May 13, 2016]
Rule 204: Advertising
Question: May an issuer advertise the “terms of the offering” under Regulation Crowdfunding?
Answer: Yes, but any such advertising that is made other than through communication channels provided by the intermediary on the intermediary’s platform will be limited to notices that include no more than the information described in Rule 204(b) of Regulation Crowdfunding. “Terms of the offering” is defined to include “the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period.” See Instruction to Rule 204. [May 13, 2016]
Question: May an issuer advertise the “terms of the offering” through a video that complies with Rule 204(b) of Regulation Crowdfunding?
Answer: Yes. [May 13, 2016]
Question: If an issuer’s advertisement does not include any of the “terms of the offering,” is the issuer limited to notices that include no more than the information described in Rule 204(b) of Regulation Crowdfunding?
Answer: No. The limitation on advertisement applies only when the advertisement includes any of the “terms of the offering.” [May 13, 2016]
Question: Could a third party publication, such as a media article, constitute a notice that would subject an issuer to the limitations of Rule 204?
Answer: Yes. If the media article 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 Rule 204. Because Rule 204 limits the information that may be in such a notice, it would likely be difficult for the issuer to comply with the rule’s requirements. If the media article did not advertise the terms of the offering, it would not be a notice subject to Rule 204, although it could still constitute an “offer” under the securities laws. [May 13, 2016]
Rule 205: Promoter Compensation
Question: When an issuer is compensating a third party to promote the issuer’s offering outside of the intermediary’s communication channels, do those third-party communications need to comply with the notice requirements of Rule 204(b) of Regulation Crowdfunding?
Answer: Yes. See Rule 205(b). [May 13, 2016]