Yes, you can advertise and promote your offering. No, you don’t have to be a broker-dealer or become a registered securities representative as long as you avoid certain activities and use certain services.
I’ll get into specifics, but first let’s recap the current state of regulations:
Capital formation for small and medium sized companies has changed dramatically in the last year and a half. Title II of the JOBS Act is now live as the new 506(c) exemption. Title IV became effective last week as the new Tier’s 1 and 2 of Reg A. Intrastate crowdfunding is legal in 17 states and being considered in 23 more. So even with Title III federal crowdfunding still not yet legal, these other approved regulations already allow technology-driven securities offerings to be conducted online (generally via websites, aka “funding platforms”) and the use of a huge variety of marketing tactics to generally solicit and attract investors.
We are seeing an explosion of capital raising for a huge variety of businesses throughout the country. Real estate is leading the charge, but firms in the technology, solar, medical, boating, legal, energy, franchise, entertainment, consumer goods, retail, hospitality and other sectors have also successfully raised money online using the new exemptions. And as lawyers, accountants, website operators (platforms), marketing professionals and others in the ecosystem become more aware of the rules, and thus better able to guide businesses (“issuers”) as they raise capital online, and as investors become increasingly comfortable investing in the equity and debt offerings they discover on various websites (platforms), the impact on capital markets and financing is profound.
What is “General Solicitation”?
Although general solicitation is not explicitly defined in statute, it is generally construed to mean promoting and advertising securities offerings through public channels including newspaper, television, radio, seminars, social media and, of course, the internet. While prohibited since 1933 for non-public companies, the ability to now use general solicitation allows businesses to broadly market their private securities offerings as they try to find capital.
Prior to the JOBS Act and the new rules recently issued by the SEC, investors could not be contacted concerning investing in a private company unless there was a substantive, pre-existing relationship between the issuer and the investor. Obviously that made it extremely tough for small and medium sized businesses (“SME’s”) to raise capital, especially since their financing needs are almost always too small to interest a broker-dealer. Congress and the SEC changed the rules to allow general solicitation specifically in order to enhance the ability for SME’s to find funding. The rational being that it can be permitted because sales under 506(c) are restricted to accredited (aka wealthy) investors who theoretically can bear the risk of loss. And with Reg A+, which also permits the use of general solicitation and investment by non-accredited investors (everyone else) the SEC has given the market some much needed tools to get businesses financed, create jobs and build the economy.
Do’s & Don’ts
Not a broker-dealer? Here’s what you can and can’t do.
a. Put your offering on a website and enable investors to participate with the click of a button.
b. Advertise your offering via:
· Sending general, fact-based emails
· Magazine & newsletters
· Signs in your lobby or business
· Pitching angel groups
· Organizing seminars
· Letting your employees, suppliers, customers and others know you’re raising money
· Hiring a PR firm
· Hiring a marketing firm & placing ads
· Putting it on distribution sites like DealFlow, AngelList, Gust, and Fnex
· Renting a blimp to circle the Super Bowl and drop leaflets on the crowd
==> In other words, pretty much any way you want!
c. Speak with investors who call you on the phone or meet you in person to answer fact-based questions as disclosed in your offering materials.
And the advertisements don’t need to be just boring, dry “tombstone” ads. You can showcase your business with colorful ads, with video’s, with online social media, and just about any way you want.
a. Say that anything is risk free or guaranteed. Ever. The SEC holds that ALL private securities are high risk. If you discuss or mention risk then you are likely stating an opinion and not a fact, which is a problem. You can say things like “secured by the property” or “personally guaranteed” if those are factual statements, but don’t add subjective language such as a risk statement. In practice you should always run ads by your attorney before you go live.
b. “Puff up” your advertisements with any untrue or non-factual information (e.g. you can provide estimates, such as sales projections or projected returns, so long as they are designated as such and disclosed in your offering materials). Again, have your lawyer review the ads before you use them.
c. Pay anyone any compensation of any type that is tied (“contingent”) to the success or amount of the offering, unless that person is a broker-dealer. In other words, whatever you pay for advertisements and help (e.g. a PR firm, platform listing fee, etc) has to be “non-contingent”, meaning they get paid their negotiated rate whether or not you raise the money. Only licensed securities professionals can receive commissions or other forms of transaction based compensation.
d. Provide advice or make recommendations to any investor unless you are a licensed securities professional. In other words it’s fine to tell someone you are raising money for your business and answer any fact-based questions they may have, but you cannot tell them that they should definitely invest because the offering is suitable and appropriate for them individually (either they have to come to that conclusion themselves or rely on a licensed securities professional).
Your attorney and service providers will work with you to ensure your offering is compliant with regulations. This includes having enough disclosures to satisfy the requirements of the Securities Act of 1933, writing an investor subscription agreement, running anti-money laundering checks on every investor to ensure prohibited persons are not trying to use your offering for illegal purposes, setting up your securities and investors with a registered transfer agent so you can manage your investor base and handle inevitable changes of ownership, and setting up escrow to easily obtain and clear funds from investors. You should also be sure to direct investors to the website where your offering disclosures are located, regardless of how you generally solicit the offering.
A Critical Technicality – who actually “sells” the securities?
Under federal law you are free to sell your securities to any investor you want, as long as you meet each aspect of the exemption on which you are relying. However this gets tricky under state laws. For example, most states have some form of an “issuer exemption” which permits businesses to raise capital without using a broker-dealer provided certain conditions are met; the most common being that you can only conduct one offering per year and, increasingly common, do not use any form of general solicitation. Participating in more than one offering a year designates you as a “serial issuer” and generally requires your securities to be “sold” by a securities dealer who is registered in every state where investors reside. And some states are now considering any use of general solicitation to void whatever issuer exemption they may otherwise have, and, again, require the securities to be sold by a dealer who is registered in their state.
Of course no issuer wants to become a broker-dealer as that’s not the business they are in and there’s no reason to subject themselves to unnecessary regulatory oversight and operating restrictions. So the options are to; a. pay a law firm to research the issuer exemptions as interpreted individually by each of the 50 states, or, b. negotiate with a broker-dealer such as FundAmerica Securities to represent the issuer and execute the sale of securities to interested investors.
We are now witnessing widespread technology-driven fundraising that leverages the newly permitted use of general solicitation. There are now federal and state exemptions that allow the sales of securities to accredited and even non-accredited investors. These new methods of raising capital can only be successful if they are done in a compliant manner, and education is the key. Regulators and authorities hold that ignorance of the law is not a defense, so it is critical that issuers engage lawyers, accountants and service providers who are experts in this area of securities regulation.
It’s important for you to not be paralyzed with fear, as the rules are in place and many issuers are conducting successful offerings every day. Simply respect the fact that you are selling securities (equity or debt), that securities are regulated, that there’s no way around that, that you have to comply with the rules, and that there will be some costs of doing business. But you can do a lot, without spending a fortune.
The rules are there, the professional ecosystem is rapidly developing, and you now have the ability to go out and tell the world about your business and your need for capital.
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.