PUT OUT THE “FOR SALE” SIGN – New CDI 141.05 Allows General Advertising By Issuer In An Intrastate Offering

Sale red sign with copy spaceIn my prior post “SEC Releases New Guidance On Intrastate Offerings,” I reviewed Compliance and Disclosure Interpretations (“C&DIs”) numbers 141.03, 141.04 and 141.05 released by the SEC in April relating to securities offerings made pursuant to Rule 147 and Section 3(a)(11) of the Securities Act of 1933 (a/k/a the “intrastate offering exemption”). While C&DI 141.05 was seen as somewhat of a deathblow to the viability of intrastate crowdfunding offerings, a new version C&DI 141.05 recently issued by the SEC offers renewed hope.

The most troublesome of the April C&DIs was 141.05 which related to whether an issuer could use its own website and/or social media presence to promote an offering made by such issuer in reliance on an intrastate offering exemption. C&DI 141.05 originally provided as follows:

SEC CDI ImgQuestion: 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, indiscriminate manner. 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.

The above makes it clear that an issuer would NOT have been able to use their own website or social media presence to promote their intrastate offering. It should be noted that, pursuant to C&DI 141.04, an issuer would be able to use “a third-party Internet portal to promote an offering to residents” within their state (subject to certain restrictions and other requirements) but again they could not self-promote. This nonsensical distinction, and the resulting inability of an issuer to self-promote its own offering, was generally seen as a serious impediment to the viability of using intrastate offering exemptions to conduct crowdfunding. As Joe Wallin, the father of the Washington State intrastate exemption, pointed out when discussing the effects C&DI 141.05 would have on the State’s exemption:

Joe-Wallin“The immediate impact of this informal April 2014 SEC Staff ruling is to nullify one of the more important features of the Washington statute … the ability of an issuer to communicate with the public via the Internet to call attention to its intrastate crowdfunded offering”

Well the good news for Joe and everyone else is that the SEC seems to have retreated from its die-hard stance above. Late last week the SEC released a new version of C&DI 141.05 which provides, in response to the question above, as follows:

Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad, indiscriminate manner. 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.

Advertise keyboard key fingerAs you can see, not only does the newly added portion of the answer permit an issuer to promote its offering through their own website or social media, but it also provides an accepted “safe harbor” manner for limiting access to information to residents of the issuer’s state. This revised answer is huge improvement from the original and breathes new life into the viability of intrastate offerings as an alternative Title III crowdfunding. Also, while it is not made specific, I believe it is reasonable to assume that the above described “technological measures” would be accepted by the SEC as an “adequate measure” for an internet portal to use in vetting offerees for purposes of C&DI 141.04.

With the delay in the release of final Title III crowdfunding rules, intrastate crowdfunding continues to move forward and grow in popularity in many states. Maybe the revised C&DI is a nod from the SEC accepting the growing use of intrastate crowdfunding or maybe it’s just their attempt to throw a bone to those waiting for final Title III rules. Whatever the reason, this new C&DI significantly increases the viability of conducting intrastate offerings and will only add to their growing use.

Angel InvestorOh and what did Joe Wallin have to say when I told him about the revised version of C&DI 141.05?  … “The SEC has finally answered my prayers, this is BIG!!!

About Anthony Zeoli

Anthony Zeoli is an experienced transactional attorney with a national practice. Specializing in the areas of securities, commercial finance, real estate and general corporate law, his clients range from individuals and small privately held businesses to multi-million dollar entities. Mr. Zeoli is also an industry-recognized crowdfunding, peer-to-peer (P2P) lending and JOBS Act expert and is currently an active board member and Secretary of the CfPA (Crowdfunding Professional Association) and an active member of CFIRA (Crowdfund Intermediary Regulatory Advocates). Most recently he drafted Illinois House Bill 3420, a bill which provides for an intrastate crowdfunding exemption in Illinois and which was unanimously approved by the Illinois’ house and Senate. Anthony is also currently actively involved with the entrepreneurship program at the University of Illinois at Chicago as both a mentor and a student advisor and is an active advisory board member of the New York Distance Learning Association (NYDLA).
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