Startup lawyer Joe Wallin recently opined about the apparent disconnect between the new equity crowdfunding exemption and federal and state securities laws’ prohibition against general solicitation (e.g., being able to publicly announce the fact that your company is selling its securities).
Existing crowdfunding programs like those on Kickstarter and IndieGoGo become wildly successful precisely because the people who run crowdfunding campaigns go out to the mountain tops to spread the word about their campaigns, and that publicity starts a viral effect. However, under the equity crowdfunding exemption in Title III of the JOBS Act, “an issuer who offers or sells securities shall…not advertise the terms of the offering, except for notices which direct investors to the funding portal”. On its surface, this prohibition seems to create a scheme where rather than the elaborate or creative social media marketing campaigns that we see for some Kickstarter campaigns, all a company can simply do is simply issue a public notice to the effect “We are selling securities. For more information go to www.equitycrowdfunding.com/companyabc.” That doesn’t exactly do much to entice people to go to the portal to find out more, and talking more at length, even about the company, can risk inadvertently revealing terms of the offering, and a cautious lawyer might advise a company against it.
Title II of the JOBS Act authorizes general solicitation for private placement offerings, but only if sales are made to accredited investors, so there’s no connection between the two concepts of general solicitation and equity crowdfunding even in the same bill! Of course, it still remains to be seen what specific regulations the SEC adopts regarding equity crowdfunding, but giving the JOBS Act’s specific limitation on solicitation for equity crowdfunding, it would likely be difficult anyway for the SEC to grealy expand solicitation rules for equity crowdfunding without exceeding the scope of congressional legislation. However, ideally the SEC rules will find some balance with the law and provide some safe-harbor provision where issuers can talk generally about their company (like the Kickstarter videos where the company tells the story of how it is going to change the world) without making specific reference to the offering while not violating the legislative prohibition in Title III of the JOBS Act against advertisement of the terms.
When equity crowdfunding is finally authorized, startups who choose to utilize it (along with their attorneys!) may have to think of ways to publicize the offerings different than the current methods used to promote crowdfunding campaigns.