What the SEC’s latest Intrastate Crowdfunding Guidance mean to the industry

HINT: It’s good news

On July 22, 2014, I wrote about the SEC’s April 10, 2014 new and revised guidance on use of the intrastate offering exemption, in light of the rapid spread of intrastate crowdfunding exemptions state by state (See here). In that piece we explained how, despite industry hyperventilation claiming that the SEC “hates intrastate crowdfunding”, the reality is to the contrary. The SEC’s April 10 guidance said nothing to forbid, or even curtail intrastate crowdfunding. Rather, it provided some much needed guidance to companies and to the industry as to how best practices when using the intrastate offering exemption should develop.

SEC vs. Intrastate Crowdfunding…?

It has been SparkMarket’s theory all along that, contrary to popular belief (and, perhaps, contrary to conventional wisdom), the SEC is neither against nor inherently skeptical of intrastate crowdfunding. In fact, we believe that the SEC supports the movement. And why not? The spread of intrastate exemptions — crowdfunding small deals, on a small scale closed environment — provides the perfect palette for test cases in this new industry. Instead of distilling and implementing already unpopular regulations in a completely new and untested space under the JOBS Act, allowing intrastate crowdfunding to develop first gives the SEC and FINRA the opportunity to see what works, and what doesn’t, before diving into the pool. What regulatory agency wouldn’t want that opportunity?

This belief was reconfirmed on October 2, 2014, when the SEC issued a revised version of new C&DI 141.05. (See here). The revision simply added new language (italicized) to the language that it originally released in April:

Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147?

Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad and open manner so that information is widely disseminated to any member of the general public. Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.

We believe, however, that issuers could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. Offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Issuers must comply with all other conditions of Rule 147, including that sales may only be made to residents of the same state as the issuer. – C&DI 141.05

When this C&DI was first released in April, it created most of the commotion in the industry in 2014. Specifically, the industry whined that it would prevent companies from using the internet to advertise offerings, and, therefore, render the intrastate exemption useless. Useless we say! Well, as we originally stated in our July post, no, it doesn’t say, or even imply that. Companies are still free to use intermediaries to facilitate these transactions, and, in any event, it contains no prohibitions of any kind, only cautionary guidance. With the revision and addition made to C&DI 141.05, the SEC clarifies that use of certain precautionary protocols based on technology (IP Address tracking) is an advisable methodology for limiting inadvertent offerings that cross state lines. Also, note that this addition addresses issuers, not intermediaries, which means, again as we originally stated, this C&DI does not prevent issuers from using the internet in facilitating these transactions, but, rather, simply provides cautionary guidance in doing so.

One last aspect is worth highlighting. The very last clause in the additional language: “…including that sales may only be made to residents of the same state as the issuer” (emphasis added), signals to us that the SEC is inviting issuers to focus primarily on sales, not inadvertent offers. This is consistent with a growing acceptance by the SEC that the internet exists, and is an inescapable (and valid) tool of modern information dissemination. Obviously, based on Section 3(a)(11) and Rule 147, issuers must still take great care that their offers do not slip over state lines. However, a focus on really trying to prevent sales across state lines, as opposed to focusing on accidental offers to catch issuers in a “gotcha” moment, is both proper and prudent.

We applaud the SEC for continuing to evolve this guidance. It helps intrastate crowdfunding now, and, further, It will help interstate crowdfunding (and the SEC itself) in the future

> Jeff Bekiares | jeff@sparkmarket.com