Background:
As a reminder, on April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended. Although the Crowdfunding Act is, by definition, an exemption from the registration requirements and therefore a new form of private placement, innovative and forward thinking minds have already come up with a method of utilizing the crowdfunding methodology for a public, registered offering.
What is a crowdfunding registered offering:
A crowdfunding registered offering is a combination of direct public offering (DPO) and initial public offering (IPO). As I have blogged about in the past, a DPO is like an IPO except the Issuing Company does not use an underwriter to place and sell the stock. In an IPO, the Issuing Company actually sells to the underwriter or underwriters who immediately resell to other broker dealers and retail customers. In a DPO, the Company sells directly to the retail customer. In a crowdfunding registered offering an Issuing Company utilizes the services of a third party service provider, such as a broker dealer or crowdfunding intermediary, to assist in the presentation and advertising of what would otherwise be a DPO.
Although the term “crowdfunding” is being used the registered offering as described below, actually utilizes the rules of the Securities Offering Reform Act of 2005. Normally all communications regarding a registered offering must meet the content requirements of a prospectus and include all of the required prospectus disclosures (including financial statements and a slew of important factual, but rather boring, information on the company). The Securities Offering Reform Act amended Rule 134 (communications not deemed a prospectus) of the Securities Act of 1933, to allow certain oral communications by an Issuing Company, following the filing of a registration statement and prior to its going effective, that do not have to include all the disclosures contained in a prospectus.
The rule amendment went to great lengths to distinguish between oral, graphic and written communications. Graphic and written communications need to be filed with the SEC and need to meet the disclosure requirements of a prospectus. Oral communications need not. Moreover, communications that are transmitted electronically to a live audience in real time will be considered an oral communication, even if electronic means are used for the transmission (such as multiple physical venues or the over the internet).
To repeat, oral communications, including live real time internet broadcasts, made by an officer or director of an Issuing company are allowed following the filing of a registration statement and pending its effectiveness. Of course, the communication is subject to the anti-fraud provisions, but it is not required to meet all the requirements of a prospectus (which would make for a very long and boring presentation!).
In a crowdfunding registered offering an Issuing Company utilizes the services of a third party service provider, such as a broker dealer or crowdfunding intermediary, to assist in putting together and transmitting live internet road show presentations by an Issuing Company, to large numbers of prequalified potential investors.
However, and importantly, no sales of securities may be made prior to the effectiveness of a registration statement. So while these live internet presentations are helpful in creating interest, the next step will be actually making sales of stock following the effectiveness of a registration statement.
There’s more:
I have so far described how internet crowdfunding can be used during the period following the filing of a registration statement and prior to its effectiveness. Although this is helpful, it does not close the sale. Following the effectiveness of a registration statement, a company can advertise (within certain restrictions) and promote the sale of its now registered securities. The intermediaries and broker dealers that are offering services in presenting live internet broadcasts during the pre-effectiveness period are likewise offering services during the post effectiveness period. At least one such provider (MediaShares) is offering to launch a social media campaign and other post effective promotion of the Issuing Company’s registered stock. If the service provider is a broker dealer, they can go so far as to collect the sales proceeds on behalf of the Company and deliver the sold shares to the investor.
Conclusion:
My first reaction is that this process could be very expensive for the Issuing Company. My estimate is between $200,000 and $300,000. However, the biggest drawback with a DPO is that it can be hard to place, and if a service provider can help you place the deal, and you are raising enough to cover these expenses, it may be worth it. Moreover, whereas an underwriter is very picky on who they are willing to underwrite, my guess is that these service providers will work with any Company that is willing to and can afford the fees.
Finally, I am certain that a broker dealer offering such services will need to comply with FINRA rules and regulations regarding such services, including the fees that may be charged, net cap requirements associated with holding stock and funds, etc.., but that is a blog for another day.
The Author
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.
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