Following on the heels of the CFIRA meetings I took part in with the SEC staff who drafted the Equity Crowdfunding rules, I wanted to give an update and round-up of some new jargon to be conversant with.
The meetings with the SEC went well. CFIRA pushed for a few points in particular, all of which we were encouraged to submit more formal comment letters on. In particular, CFIRA’s main points to discuss with the staff were:
- Reduced liability exposure of Portals for Issuer errors/omissions in their offering docs.
- Removing the proposed rule for ongoing annual audited financials for Issuers following a 4(a)6 raise of over $500k.
- Clarity on the timing of requirements for investors to go through a full “opening of an account” with the intermediary. Because officially opening an account requires significant time and necessary steps for the investor, it would limit the number of investors or size of the crowd viewing these deals.
- Allowing for multiple Issuers under common control of a single entity to conduct parallel raises, so long as a standard was met to ensure that the structure was being used to fund something more akin to franchises than just multiple investment vehicles into the same company.
- More clarity on the use of automated objective criteria for filters in displaying lists of deals on an intermediary’s platform. The interest here is in separating this from any notion of investment advice or deal curation.
- Clarity on which services the platform intermediaries will be allowed to outsource to 3rd party service providers. As proposed, back office and administrative services are allowed to be outsourced, but we would like more clarity on what qualifies in this arena, as the service provider ecosystem develops.
We got some traction on each of these points and were glad to see that the staff were willing to engage with us on each of these points. Our formal comments will make our case on each of these areas with more detail, but think there is room to get some changes on each of these items.
After hobnobbing around the SEC headquarters for 2 days, it’s also clear that we have some new names for Equity Crowdfunding. Under Title III of the JOBS Act, you should get used to the following:
- These will likely be referred to as “4(a)6 offerings”, under their new section in the Securities Act of 1933. If you’re around lawyers or securities experts, best to use that term
- The SEC has also referred to this type of crowdfunding as “Regulation Crowdfunding”. It is a shade sweeter than “Regulated Crowdfunding”, I supposed.
- I still like “Equity Crowdfunding” or “Title III Crowdfunding” personally.
We also finally have some consensus on what to call generally solicited private offerings. Depending on the type of exemption you are offering under and just how you want to generally solicit, you will be conducing a 506(b) offering or a 506(c) offering. These refer to the specific rules under Regulation D that allow for the offerings that are exempt from full registration with the SEC. This type of offering is also sometimes referred to as “Accredited Investor Crowdfunding”, “Title II Crowdfunding”, or “Regulation D Crowdfunding”. I’ve recently standardized on calling these types of investment platforms “506 Offering Platforms”.