SEC’s Intrastate Crowdfunding Guidance
Everyone Calm Down
On April 10, 2014, the SEC released new guidance related to use of the intrastate offering exemption with wider implications for the blossoming intrastate crowdfunding movement. (See 141.03, 141.04 & 141.05: http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#141-03. Since then a raft of lawyers, accountants and self-anointed intrastate experts have burned up the crowd-sphere with commentary on how the SEC’s guidance ruins everything. It does no such thing. Everyone Calm Down.
First off, as a matter of industry wide pride and recognition, let’s take a moment to be happy in reflecting on the fact that the SEC issued such guidance at all. The intrastate exemption, while old and venerable, has been much underused and underdiscussed for over half a century. That the SEC took the opportunity (in one of its many moments of spare time; remember, it has a lot to do these days) to issue such guidance is a win for the intrastate crowdfunding movement. It demonstrates that the SEC recognizes that this industry is developing and growing, and it cares enough to get informal guidance into the marketplace to help businesses and service professionals operate in a compliant and safe manner. In April 2013 it would have been unimaginable to even see the industry “wasting time” on the quaint little ‘phenomenon’ that is intrastate crowdfunding. One year later, we have SEC recognition and nobody can avoid the topic anymore. What a difference a year makes.
So what we have now (and, may I remind, all we have) is 2.5 (2 new and 1 revised) recent Compliance and Disclosure Interpretations (C&DIs) from the SEC related to use of the intrastate offering. Let’s examine them in turn, and see what’s being said out there:
Revised C&DI 141.03 — This revised C&DI breaks no new ground and states what is already known: that issuers are free to use general solicitation to sell securities in an unregistered public offering on an intrastate basis, provided that they comply with Section 3(a)(11) (and Rule 147 to claim the safe-harbor). The intrastate exemption for issuers has been around since its inception in an essentially uninterrupted form. That it has, historically, been narrowly construed is neither news nor cause for alarm. True, the Internet provides a new (or, newish, remember everyone it is 2014) mechanism for testing these boundaries, but we have no reason to believe that the SEC will (or even could) forbid its use in a responsible manner in the facilitation of intrastate offerings. Eliminating the intrastate exemption would take an Act of Congress, and the winds are blowing in the direction of more permissive offering laws (at the State and Federal levels), not less.
New C&DI 141.04 — This new C&DI deals with the roles of intermediaries/portals in the intrastate space. First, it clearly recognizes that intermediaries are both likely and anticipated in this space. All that is required is “adequate measures” to ensure that offers are only made to residents of the issuer’s State. It goes on to state that minimum adequate measures would include disclaimers and self-certification of residency. Responsible portals (like SparkMarket, for example) will already be in compliance with these requirements as a prudent matter of good governance. Legends and investor certifications have been a part of just about every securities transaction I have ever seen. These are neither difficult nor unreasonable, and most intermediaries will probably choose to over-comply with the plain reading of this C&DI to ensure that issuers meet the intrastate exemption requirements.
New C&DI 141.05 — This new C&DI is where most of the fuss is being made in the industry. It makes it clear that the SEC has concerns about issuers using their own websites and social media (not that of third parties or portals) to advertise in an indiscriminate manner. Traditionally minded securities lawyers and broker/dealers have seized upon this as evidence that the “SEC won’t let issuers use the Internet” for intrastate offerings. It says no such thing. First, it says nothing about using a dedicated intermediary’s website for this purpose, which, as C&DI 141.04 (see above) makes clear, is not only contemplated, but anticipated. Second, it only says that, generally, websites / social media are used in a broad indiscriminate manner of advertising that is inconsistent with the intrastate offering; leaving the negative implication to anyone paying attention that, specifically, they might be tailored in such a fashion as to not slip over such a threshold.
In summary, a reading of these C&DIs (and, as I remind, these alone) that the SEC disallows use of the Internet and/or intermediaries, or even disallows intrastate crowdfunding altogether is unsupported and unwarranted. As previously mentioned, when we started SparkMarket, we were essentially plowing ground based on a conjunction of 80 year old federal law and 1 month old law in 2 US States (Kansas & Georgia). A little over 2 years later, it is 12+ States, and spreading fast, including, we believe, shortly, to Texas. NASAA can say whatever they want (see here http://www.nasaa.org/wp-content/uploads/2011/08/NASAA-Letter-to-NCSL-on-State-Crowdfunding-Bills-1-17-14.pdf), but intrastate crowdfunding is both legal and safe. Those State securities administrators who do not embrace the phenomenon (which, we predict, will be a minority of them within 18 months time) are hurting the competitiveness of their State, based on erroneous readings of the ’33 Act, the ’34 Act and these C&DIs. That many are coming from a place of investor protection is understandable and laudable. It is also a fear unsupported by the evidence(but that’s a discussion for a different day).
Intrastate exemptions are spreading because it is a truly bi-partisan, non-controversial issue in the States. Intrastate crowdfunding laws cut bureaucratic cost/overhead, are business/entrepreneur friendly and are a rare chance to express the continuing usefulness of the principles of federalism, upon which our Country was founded; whilst, simultaneously supporting local communities and civic projects. These are right/left issues, and, thus, where they are passing, we see them passing, basically unopposed (which, if you know anything about US politics is a rarity these days; our legislatures couldn’t even agree on a Mothersday resolution).
The SEC is not out to squash this industry. Nor are they are not out to rewrite the 10th Amendment to the US Constitution. They are only trying to provide a little (helpful) guidance to an industry that they recognize is growing within the law. As service providers, it is up to us to help the industry continue to grow in a sustainable and responsible fashion.
One last note. The reason that it took SparkMarket 3 months to write commentary on the foregoing is not because we were concerned that these C&DIs held major negative implications for our model. Rather, simply, we just didn’t see what the big deal was until the predictable industry hyperventilation kicked into high-gear. Again, calm down. These C&DIs are a mixture of what we already knew, and what we all could have reasonably expected. Now let’s get back to work.
>By Jeff Bekiares
