By: Jason Siev, Esq. and Robin Sosnow, Esq.
Advertising your Regulation Crowdfunding (“Reg CF”) offering involves navigating complex regulations set by the U.S. Securities and Exchange Commission (“SEC”). These rules are designed to ensure that all potential investors have equal access to information about the issuing company and its offering, and to uphold transparency and fairness in the market. This blogpost will guide you through the advertising rules for Reg CF issuers, outlining what you can and cannot do and say before, during, and after your offering.
Platforms and Platform Communications
Crowdfunding allows anyone, from career angel investors to laymen, to invest in the securities of small businesses. However, because of this wide range of potential investor sophistication, this opportunity imposes strict regulations to prevent misinformation or market manipulation. The SEC requires that all information about a Reg CFoffering be centralized on the funding portal or broker-dealer platform hosting the offering (the “Platform”). This centralized approach ensures that all potential investors receive the same information, thereby reducing the risk of unequal treatment or misleading disclosures.
Furthermore, most communications about the offering are required to take place exclusively on the Platform, with only limited exceptions as will be discussed below. The Platform is also required to include a communication channel, such as a chat or Q&A function, where potential investors can ask questions and engage with the issuer directly. On the Platform, issuers may communicate with investors and potential investors about the terms of the offering within the campaign page and channels provided therein, as long as the issuer identifies itself as such and the provided information is not misleading. This allows the issuer to control its messaging while ensuring that any discussions about the offering are public and accessible to all investors.
Off-Platform Communications and Advertising
Pre-Launch
Issuers must be cautious about any communications made before officially starting the launch process of their Reg CF offering. “Conditioning the market,” which is prohibited under the SEC rules, refers to activities or communications outside the normal regulatory channels that condition the market for a company’s prospective sale of securities. Certain communications and actions before filing a Form C with the SEC could be seen as conditioning the market and may be considered an unregistered offering of securities, which is a violation of Section 5 of the Securities Act. Such violations can disqualify a company from relying upon registration exemptions such as Reg CF, Rule 506 of Regulation D, or Regulation A in the future. While normal advertising for your business and its products and/or services is generally permitted, broadly advertising your potential Reg CF offering or greatly increasing general advertising efforts just before filing the Form C could be deemed “conditioning the market.” Therefore, it is best to discuss any changes to your company’s marketing strategies with legal counsel to avoid potential legal issues.
Companies are permitted, however, to gauge investor interest in a potential offering through conducting solicitations of interest, also known as “Testing the Waters” (“TTW”) activities, which are considered permitted offers under Section 5(d) and Rule 163B. Before filing an SEC Form C (the required disclosure document for Reg CF offerings), companies are allowed to make oral or written communications to determine if there is interest in a potential offering.These communications can be made through various channels, including emails or social media posts. There are, however, severaldisclaimers that must be included in all TTW communications: you must state that (1) no money or other consideration is being solicited, (2) no offer to buy the securities can be accepted until the offering statement is filed, and (3) an indication of interest involves no obligation or commitment. Any written or broadcast TTW communications must be filed as an exhibit to your Form C, should you choose to pursue a Reg CF offering thereafter. Additionally, these communications are subject to the securities law provisions that impose liability for misleading statements.
Post-Launch
Once you have launched your Reg CF offering by filing your Form C, your communications can fall into two primary categories: “tombstone” communications and non-terms communications.
The first category, “tombstone” communications, involves factual notices that strictly contain basic information about the offering and its terms (i.e. the number of securities offered, the nature of the securities, the price per security, the closing date of the offering period, the intended use of proceeds, and the issuer’s progress toward meeting the funding goal). According to the Reg CF rules, tombstone notices can include (1) a statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, (2) the name of the Platform, (3) the basic terms of the offering, and (4) brief factual information about the issuer, such as the name, address, and a short description of the business. These notices can be widely distributed, including on social media, newspapers, TV, and other mediums. However, they must strictly adhere to the factual nature of the offering and should not include embellishments or additional context, which could be seen as misleading.
Non-terms communications are general communications that do not mention the “terms of the offering.” In non-terms communications, you can talk about your company’s mission, operations, and the fact that you are conducting an offering, but you cannot reference any ofthe offering terms outside the Platform. Instead, you can direct potential investors to the Platform for more details. You should be careful about linking to content that includes offering terms, as doing so can be interpreted as an indirect communication of the terms, which may violate SEC rules.
Additionally, when it comes to your company website during the offering period, avoid including offering terms unless the entire site complies with the tombstone rules. A practical approach is to create a landing page that acts as a gate to your regular website. This landing page can include the tombstone information and links that direct visitors either to your main website or the Platform page for your offering. Furthermore, social media and email campaigns can be used to promote your offering as long as such communications stick to either non-terms communications or tombstone information. Personalized emails to friends or acquaintances are also generally acceptable, but be careful not to provide more information than what’s permitted under the applicable communication category, as this could result in unequal information distribution.
Post–Closing
After your offering closes, the Rule 204 limitations listed above no longer apply. This means you can generally communicate freelywithout distinguishing between terms and non-term communications. However, even after the offering has ended, it is important to avoid making misleading statements that could attract regulatory scrutiny.
Understanding and complying with these advertising rules is crucial to successfully navigating a regulated investment crowdfundingcampaign under Reg CF. By adhering to SEC guidelines, small businesss, and startup owners and executives, can effectively promote their offerings while ensuring transparency and fairness for all potential investors. When in doubt, consult with legal counsel about the specifics of your company, its offering, and its communications, as compliance with SEC regulations is crucial to the success and legality of your crowdfunding efforts and any future offerings you may wish to undertake.