Background
The Securities and Exchange Commission (“SEC”) adopted the final rules of Regulation Crowdfunding (the “Regulation”) on October 30, 2015. While the final rules have been adopted, they do not become effective until May 16, 2016. The Regulation is meant to expound upon Sections 4(a)(6) and 4A of the Securities Act of 1933 (the “Act”), both of which provide limited exemptions from registering securities under the Act when a company sells securities by crowdfunding. Crowdfunding occurs when a large group of investors combines resources to support a third party’s efforts to reach a goal. Crowdfunding activities have become more popular and accessible in recent years due to the Internet.
Rule 204
Section 4A(b)(2) prohibits crowdfunding issuers from advertising the terms of a crowdfunding offering, except for notices that direct investors to an intermediary’s platform, which is either a broker or funding portal registered with the SEC. Rule 204, one of the many rules that compose the Regulation, provides more clarity to this section by limiting the amount of information that can be included in the notice.
After the release of the proposed Rule 204 for comments, some commenters were concerned that the Rule would impose an unnecessary burden by not allowing for crowdfunding efforts through brief and informal social media communications. The SEC responded that issuers still have the option to use brief social media communications because Rule 204 simply provides a limit on the information that may be included in a notice. A brief statement on a website or social media account that the issuer is conducting a crowdfunding offering is acceptable as long as it directs investors to the materials on the intermediary’s platform.
What does this mean for you?
Social media outlets provide an excellent opportunity for crowdfunding issuers to raise funds. Communications through a Facebook or Twitter account can quickly spread word of fundraising efforts, but a crowdfunding issuer must still tread lightly. While social media communications are often brief and informal, the securities laws certainly are not. The same brevity and informality that make social media communications popular can also result in haphazard communications. One noncompliant communication through social media could result in serious violations of securities laws. An issuer wishing to take advantage of social media to advertise the terms of a crowdfunding offer should always consider the legal consequences, no matter how brief or informal the communication may be.
