Issuer Guidance on How to Market a Security Token Offering in the United States Under Reg D 506(c)
Please note that I am not a lawyer and this is not legal advice. You should consult with your attorney, as we did, before conducting a 506(b) or 506(c) offering. US Securities regulations (and interpretations regarding such regulations) are subject to change.
The information below is based on my research and understanding of the laws that exist as it pertains to marketing a Reg D 506(c) offering in the United States.
With the SEC still actively combatting fraudulent ICOs that launched in 2017, it’s become imperative that companies are fully aware of what can and can’t be done when it comes to marketing your token offering. As many of you probably already know, under rule 506(c) issuers are allowed to advertise private investments through means of ‘general solicitation’ or ‘general advertising’. Luckily for you and me, the SEC has not explicitly defined the terms “general solicitation” or “general advertising” under Reg D and have provided little guidance, which leaves many of today’s digital marketing tactics up to interpretation. This can quickly become daunting and also confusing for the issuer. However, the SEC does inadvertently provide some insight through Rule 502(c), giving us a list of a few examples it defines as general solicitation and general advertising:
- “any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio.”
- “any seminar or meetings whose attendees have been invited by any general solicitation or general advertising.”
This insight, while helpful, is still quite vague and does little to mention the usage of the internet or digital advertisements as a form of communication or “investor reach”. As someone who has just recently navigated marketing compliance for a Reg D 506(c) and Reg S STO, believe me… it can be daunting. I felt it would be helpful to provide some insight surrounding areas of your digital marketing strategy that may help provide guidance in those digital grey areas. The areas of focus I felt would be useful are:
- Social Media & Programmatic Advertising
- Messaging & Content
- Website & Landing Page
- PR & Media
Social Media & Programmatic Advertising:
With programmatic advertising on the rise and social media advertising in the crypto space newly reinstated by two of the largest online advertising companies, it’s going to be important for companies to establish a baseline operating procedure for digital advertising. With a significant background in social media, I figured I would tackle this section first.
When it came to identifying potential compliance liabilities for social media advertising, I looked at three major components of any ad strategy:
- Who is the promotion going to reach?
- Where is the promotion going to be published?
- Content and messaging (This is so important I made a standalone section below)
When it came to audience development, I knew the best place to start would be to take reasonable steps to assume the individuals I would be targeting were most likely accredited investors. If you’re this far, I assume you already know the SEC requirements to be considered an accredited investor. This doesn’t only help make sure that your promotion is going to someone who may potentially become an investor, it also helps with investor compliance. Unlike 506(b) which allows up to 35 non-accredited investors who meet the sophistication requirements to participate as investors, 506(c) allows ZERO. It requires the company to conduct a thorough investor verification to ensure that each investor is accredited.
Now remember, just because you might be over the SEC hurdle, each advertising channel has its own terms of service and you’re bound to those as well. It’s important to understand each platform’s stance on advertising as it relates to soliciting investments and also their stance on cryptocurrency since there is some foundational overlap between ICOs and STOs.
Please note that Twitter has previously banned people who solicit crypto and LinkedIn has flat-out banned it.
My Best Practice: Social Media Ads, whether it’s on Facebook or Google, that will utilize targeted audiences, are OK. When developing your audience, it’s important to be sure that the foundational elements of this audience, like accredited investor income and asset requirements defined by the SEC, are taken into consideration. This can be achieved by targeting individuals based on census data like income, net worth, liquid assets, or spending. It also helps to refine interest and behavioral data for your audience to better reflect accredited investors only. This could be based on widely available information or detailed research.
When it comes to TV, luckily 502(c) addresses it as an acceptable form of advertising which means this portion of your programmatic advertising campaign is covered. However, programmatic also spans across streaming services and other online ad platforms where the communications may be considered digital marketing. I would apply the same rules as social media to programmatic. However, since your content will mainly be video, it will be important to ensure compliance through your messaging which I touch on below. I am not as versed with pay-per-click (PPC) but after an inquiry with someone who has significant expertise, it’s safe to say the same rules would also generally apply to any sort of display or PPC campaigns.
Messaging & Content
After diving further into my SEC interpretations research, it became apparent that limiting the audience wasn’t going to be enough to ensure our ads were as compliant as possible. When I began to look at content and general solicitation I found something interesting. When it comes to investor communications the SEC obviously has a strong stance on “factual information.” They also don’t consider factual information that is disseminated from your company during your offering to be considered general solicitation. This is great because that means there is really no limit on the ads you run surrounding factual company information.
So what’s allowed?
The SEC considers factual information to be accurate information about the issuers:
- Financial Condition
- Products or Services (+ advertisements of these products and services should they not include information about your offer)
This can allow individuals creating promotions to leverage all their companies forward momentum in their advertising campaign (as long as the information is factual!) So you might be thinking “okay that’s fine, investors obviously care about those things, but what about my IDEA!”
Another helpful safe harbor provided by the SEC comes under Rule 168 and Rule 169. This rule suggests that issuers may publicly publish forward-looking statements as they relate to projections of the issuer’s revenues, income (loss), earnings (loss) price per share, and also statements about management’s plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer. This can allow your publications, promotions, and ads to feature content and messaging that may focus on future company plans or product offerings.
My Best Practice: When it comes to developing content and messaging, it’s evident that common sense is going to be the best approach. The content should never suggest to potential investors any sort of guaranteed ROI or expected price per share. I also think it’s smart to tread lightly when it comes to publishing forward-looking statements as it could be interpreted as being beneficial to the future share price.
It’s OK for you to issue advertisements that talk about factual company advancements, new partners, fundraising announcements, new clients, projects, etc… It’s also OK to publish ads about the future developments of your company and what your timeline looks like. These sort of statements may be forward-looking so it’s important to make sure that all of your content and messaging is consistent with previously published content, ads or announcements.
Website & Landing Page
Under Rule 506(c) you are not required to restrict access to your website while actively fundraising. However, if you are concurrently running an international Reg S offering alongside your Reg D offering, there may be some considerations around who can and cannot access your website. I’ll talk about that more in Part 2 of this series.
Your website can provide detailed information about your STO and may also include access to supporting documentation around your company and it’s products. This all falls under the factual information guidance the SEC provides and is also one of my “common sense” areas of focus. Let’s be real, the website should NEVER have inaccurate information on it if it’s for a legitimate business with a legitimate product or service. One thing to keep in mind though is that since the landing page or website may be directly associated with any sort of on-going digital campaign, it makes it even more important to make sure the content that is published on the site, and any of the documentation accessible through it, is factual and accurate.
My Best Practice: Taking steps to be sure that Ads are compliant and don’t provide any misleading information shouldn’t be the only concern. The website that is receiving traffic from the campaign should always provide frequently updated, accurate and factual information about the company and the offering. Sometimes it is best to ensure that campaign-specific landing pages are used so that the information in the ad represents the information on the site
If a company is solely raising money in the US it would also be best to block the website from international IP addresses. However, if the company is providing services internationally, then I would suggest blocking access to pages regarding the STO.
PR & Media
When it comes to PR the approach I feel works best is that of a public company. The content focus should be on press releases around notable company updates and featured articles talking about the about the company, it’s products, and it’s mission. PR plays an important role in the legitimacy of any fundraising initiative as it helps provide more information about the company when potential investors start their due diligence process. It’s also important to remember that factual information isn’t just important in print or on your site. Just like in any advertisement you create, individuals of the company who may be interviewed for an article or a video interview should always actively avoid making broad statements to questions that may or may not be related to fundraising or investing activities. This is best to consult with your lawyer about and have your PR representative present so they can develop a rubric for answering certain questions.
My Best Practice: Stick to the facts. If the company is naturally making great progress and the team and business are expanding, talk about that. People are more interested in the learning about the stability of the company, the individuals who are leading the teams, and what the company is working on next. Try to avoid any sort of soft selling when it comes to PR strategy. Information about the STO or a press release about securing funding is fine, but let your achievements and progress sell the company for you.
I know that a lot of this information may only scratch the surface when it comes to navigating the digital marketing landscape for a Reg D offering. When it comes to marketing and advertising a security token offering under Reg D 506(c), the most important thing to do is to take a very common sense approach to your communications. Things that can’t be corroborated through officers of the company or factual information shouldn’t be shared or leveraged to persuade an investor to invest. Hopefully, as you begin to put together your advertising strategy for your 506(c) offering, this information above can help provide some guidance on how to handle your digital promotions and ensure SEC compliance in your solicitation of investors.
Feel free to ask any questions in the comments and I’ll do my best to provide more insight.