As everyone waits for the SEC to begin rule making on Title III of the JOBS Act, a few innovative entrepreneurs are using Regulation A as a vehicle to crowdfund today.Although the procedure, as described in this blog, is not the crowdfunding procedure that will be implemented under Title III of the JOBS Act, it does allow for the use of social media and the Internet to solicit and obtain equity investment funds from the general population including unaccredited investors, of a particular state or states.
Moreover, the laws that allow for this method of fundraising are not new.The vehicle of choice is Regulation A—the existing Regulation A, not the new Regulation A+, which will be implemented under Title IV of the JOBS Act. Using Regulation A to offer securities involves the time and expense of a registered offering; however, the registered securities are free trading and may be offered to unaccredited investors.Regulation A does not preempt state law and accordingly requires full blue sky state approval for use.However, many if not most states allow for solicitation and advertising of a Regulation A offering.Accordingly, upon completing the registration process with the SEC and your chosen state(s), a Company can utilize advertising, including social media, to sell the securities in those chosen states.A few entities, such as Fundrise, are using Regulation A to register their offerings and are subsequently selling the offerings using social media, and doing it extremely successfully.
Regulation A
Although Regulation A is legally an exemption from the registration requirements contained in Section 5 of the Securities Act of 1933, as a practical matter it is more analogous to registration than an exemption.In particular, Regulation A provides for the filing with the SEC of an offering prospectus which closely resembles a registration statement.The SEC then can, and often does, comment on the filing.Practitioners often refer to Regulation A as a short form registration.
Regulation A mirrors a 1933 Act registration process in many ways.Although the Regulation A offering prospectus does not go “effective,” the regulation calls for “qualification” of the offering prospectus under circumstances that mirror those for effectiveness of a registration statement.For example, Rule 252(g) provides for the technical possibility of automatic qualification twenty days after filing the offering prospectus, much the same as Section 8(a) for registration statements.Rule 252(g) also provides for a procedure to delay such effectiveness until the SEC declares the offering “qualified,” much the same way as a registration statement’s automatic effectiveness can be delayed until the SEC declares it “effective.” Oral offers may be made after the offering prospectus is filed, just as with registration statements.Written offers must be accompanied by a preliminary offering prospectus—again, just as with registration statements.
Although Regulation A offerings have many things in common with registered offerings, they differ in many respects as well.One of the most important differences is that, in Regulation A offerings, an issuer may formally “test the waters” before the filing of an offering prospectus, by oral and written communications to potential buyers, designed to gauge interest in the offering.The written documents that may be used to “test the waters” are limited in content and must be filed with the SEC.However,a failure to file the document will not destroy the exemption if the document otherwise meets the Regulation A requirements.
The limitations on the availability to use Regulation A are similar to Rule 504.In particular, Regulation A is only available to US or Canadian companies;the issuer cannot be a blank check or development stage company; the issuer cannot be an Exchange Act reporting company or an investment company; and neither the Company nor is officers and directors can have had previous regulatory problems (the so-called “bad boy” exclusion).The maximum dollar amount of securities that may be sold under Regulation A is $5 million in a twelve-month period, of which $1.5 million can be sold by existing security holders.
State Registration
As indicated above, Regulation A does not preempt state law.Accordingly, a company that is completing a Regulation A offering must abide by both federal and state securities laws.Each state has a process whereby the Regulation A offering can be approved in that state.The state process is generally a state registration process and must be completed prior to any offers or sales of securities in that state.Most states also allow for the limited advertising of such a Regulation A offering, generally in conformity with SEC Rule 134 discussed below.
Accordingly, upon completing the state and federal Regulation A registration process, the company can utilize Rule 134 (discussed below) and coinciding state statutory provisions to market and advertise the offering, including through the use of social media, to both accredited and unaccredited investors.
That is, the Company can crowdfund the offering.
Crowdfunding the Regulation A Offering
Rule 134, promulgated under the 1933 Act, allows for the preparation and dissemination of certain communications following the filing of a registration statement.Those communications, often referred to as”free writing prospectuses,” include in pertinent part:
(1) Factual information about the legal identity and business location of the issuer limited to the following: the name of the issuer of the security, the address, phone number, and e-mail address of the issuer’s principal offices and contact for investors, the issuer’s country of organization, and the geographic areas in which it conducts business; the website address;
(2) The title of the security or securities (such as common or preferred stock, warrants, etc.) and the amount or amounts being offered, which title may include a designation as to whether the securities are convertible, exercisable, or exchangeable, and as to the ranking of the securities;
(3) A brief indication of the general type of business of the issuer, limited to the following:
(i) In the case of a manufacturing company, the general type of manufacturing, the principal products or classes of products manufactured, and the segments in which the company conducts business;
(ii) In the case of a public utility company, the general type of services rendered, a brief indication of the area served, and the segments in which the company conducts business;
(iii) In the case of an asset-backed issuer, the identity of key parties, such as sponsor, depositor, issuing entity, servicer or servicers, and trustee, the asset class of the transaction, and the identity of any credit enhancement or other support; and
(iv) In the case of any other type of company, a corresponding statement;
(4) The price of the security, or if the price is not known, the method of its determination or the bona fide estimate of the price range as specified by the issuer or the managing underwriter or underwriters;
(5) A brief description of the intended use of proceeds of the offering, if then disclosed in the prospectus that is part of the filed registration statement;
(6) The name, address, phone number, and e-mail address of the sender of the communication and the fact that it is participating, or expects to participate, in the distribution of the security;
(7) The names of underwriters participating in the offering of the securities, and their additional roles, if any, within the underwriting syndicate;
(8) The anticipated schedule for the offering (including the approximate date upon which the proposed sale to the public will begin) and a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them);
Companies such as Fundrise are successfully using this model today.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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