Crowdfunding a Going Public Transaction
The Securities and Exchange Commission (“SEC”) rules for crowdfunding remain in limbo, but 12 states have passed legislation allowing intrastate crowdfunding. The SEC as well as state securities regulators have provided meaningful guidance addressing intrastate crowdfunding. One benefit of intrastate crowdfunding is that while it will not give a company public company status, if structured properly, it can serve as a stepping stone in the right direction.
In addition, a crowdfunded offering can serve as a way for the issuer to finance its going public transaction and provide investors with an exit strategy.
To understand how crowdfunding can be used in a going public transaction, you must be familiar with the requirements of going public. This post addresses only the requirements for companies who go public by filing a registration statement with the SEC. This is most often accomplished on Form S-1.
A company going public must locate a sponsoring market maker to submit a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) in order to obtain a stock trading or ticker symbol. FINRA requires that the company be able to establish an active market for its securities. To do this, the issuer must have a sufficient number of non-affiliate stockholders with unrestricted securities. FINRA has not established the number of stockholders required to satisfy this requirement. Generally, most sponsoring market makers require at least 20 non-affiliate stockholders who hold at least 250,000 unrestricted shares.
In a crowdfunded going public transaction, the company would conduct its offering using the intrastate crowdfunding exemption to obtain the shareholders required by FINRA. In order for these shareholders to hold unrestricted shares, the company must file a registration statement with the SEC registering the resale of the shares sold in the crowdfunded offering.
Once the registration statement is declared effective, the company’s sponsoring market maker can file a Form 211 with FINRA and upon approval, FINRA will assign its ticker symbol.
Since the SEC’s crowdfunding rules are not yet established, companies using equity crowdfunding must rely on the intrastate crowdfunding exemption. Twelve states have established an intrastate crowdfunding exemption which the North American Securities Administrators Association (“NASAA”) outlines here. Companies seeking to conduct an intrastate crowdfunded offering must comply with both the federal and relevant state requirements for Rule 147 offerings.
The state law requirements for intrastate crowdfunded offerings vary from state to state. The federal requirements are summarized below.
SEC Requirements for Intrastate Crowdfunded Offerings
Section 3(a)(11) of the Securities Act provides an exemption from the registration statement requirements for any securities offering that is offered and sold only to persons who reside in a single state, where the issuer of the securities is incorporated in and doing business within, the single state. Rule 147 under the Securities Act (“Rule 147”) provides a safe harbor for offerings conducted in compliance with the requirements of Section 3(a)(11).
General Solicitation & Advertising in Intrastate Crowdfunded Offerings
Rule 147 does not prohibit an issuer from using general advertising or general solicitation in their securities offering; however, any general solicitation or advertising must consistent with Rule 147’s requirement that offers and sales be made only to persons who reside in the state or territory of where the issuer is domiciled and conducts its business.
Company Websites in Intrastate Crowdfunded Offerings
This SEC states that issuers generally communicate through their company websites and social media in a broad and indiscriminate manner to the general public. While the specific facts and circumstances of the particular offering would determine if a communication is an offer of securities, the SEC stated that using an established internet presence to disseminate information about a specific offering would likely involve offers to residents outside the state in which the issuer is domiciled and conducts business. As such, companies should create an opt-in website that is available only to residents of their states.
An issuer claiming an exemption under Rule 147 for its offering can use a crowdfunding internet portal to promote its offering to residents of a single state in accordance with a state statute or regulation intended to enable crowdfunding within that state, if the crowdfunding portal implements safeguards to ensure that offers of securities are made only to persons residing in the relevant state. These safeguards must include, at a minimum:
● disclaimers and restrictive legends setting forth that the offering is limited to residents of the relevant state under applicable law; and
● limiting access to the offering information to persons who confirm they are residents of the relevant state by using an opt in feature which limits access to offering information so that it is not available to the general public.
Companies should keep in mind that even one sale to a resident in more than one state could disqualify its reliance upon the Rule 147 crowdfunding exemption. Additionally, the offering materials should clearly reflect that proceeds of the crowdfunded offering will be used to finance the company’s going public transaction. The crowdfunding exemption is only an exemption from securities registration requirements. It does not change the securities law disclosure requirements and both federal and state informational requirements continue to apply including disclosures of all material facts and risks to investors.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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