Advertising - Litigation Alert
As discussed in greater detail later, the Regulation CF crowdfunding offering must take place on the intermediary’s platform. Other than the notice of the crowdfunding offering, advertising the offering outside of the platform is prohibited. If you suddenly embark on a public relations campaign that coincides with your crowdfunding offering, investor plaintiffs may argue that information that you publish outside of the intermediary’s platform close in time or during your crowdfunding offering constitutes “advertising” the offering.
What type of campaign can you undertake to promote your company or its product or service shortly before or during your crowdfunding offering?
The legal issue is whether communications by an issuer constitute an “offer” or impermissible conditioning of the market. In the Crowdfunding Release, the SEC notes that it has interpreted the term “offer” broadly, explaining “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer…”1
The SEC notes in the Crowdfunding Release that Securities Act Rule 169 permits issuers that are not publicly reporting companies (i.e., do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) that are engaged in an initial public offering to continue to publish, subject to certain exclusions and conditions, regularly released factual business information that is intended for use by persons other than in their capacity as investors. The Crowdfunding Release states that whether a communication is limited to factual business information depends on the facts and circumstances of that particular communication, but that issuers conducting crowdfunding offerings under Regulation CF may generally look to Rule 169 for guidance.2
If, prior to your Regulation CF crowdfunding campaign, you have not regularly published information on your website or otherwise publicly discussed your company or its products through a press release, for example, you must be careful if you publish information immediately before and during your crowdfunding campaign. You should not promote your company, product or service in a manner or with such frequency that is inconsistent with the manner or frequency with which you promoted such information prior to your crowdfunding offering. Thus, it may be helpful to establish your public relations practice in advance of commencing your crowdfunding offering if you plan to disseminate company information during the offering period.
If you have not established a public relations practice, any promotional campaign that you conduct at the time of your crowdfunding campaign may be closely scrutinized by the SEC or by private litigants, so seek the advice of experience legal counsel about such communications.
1. See Crowdfunding Release, p. 144. and note 553 citing Securities Offering Reform, Release No. 33-8591 (Jul 19, 2005) [70 FR 44722 (Aug 3, 2005)] at 44731. Citing Diskin v. Lomasney & Co., 452 F.2d 871 (2nd Cir 1971), the SEC notes that the term “offer” has been interpreted broadly and goes beyond the common law concept of an offer↵
2. See Crowdfunding Release, p. 144. ↵
Written by: Mark T. Hiraide, Partner, Mitchell Silberberg & Knupp LLP. Excerpted from Crowdfunding: Practical Guide to the SEC's Final Rules for Raising Capital, available for purchase on ThomsonReuters.com. This practical guide focuses on you, the entrepreneur, and your legal counsel and the information that will help you take full and safe advantage of the crowdfunding approach to raising capital.