Due Diligence in Accredited Crowdfunding Offerings – Securities Lawyer 101
The Anti-Fraud Provisions That Apply to Accredited Crowdfunding
Even though Accredited Crowdfunding Offerings are exempt under Rule 506(c) and no specific disclosure requirements apply, under most circumstances, the anti-fraud provisions mandate disclosure of certain information to investors. Section 10(b) of the Securities Exchange Act of 1934, (the “Exchange Act”) prohibits the use of any manipulative or deceptive device in contravention of the Securities & Exchange Commission’s rules and regulations. Rule 10b-5, was adopted pursuant to Section 10(b), and prohibits fraudulent devices and schemes, material misstatements and omissions of any material facts, and acts and practices that operate as a fraud or deceit on any person in connection with the purchase or sale of a security.
This means that each participant in a company’s offering, including the company, itself and its officers, directors, consultants, advisors, underwriters, accountants and others are potentially liable under this provision. Section 20(a) of the Exchange Act imposes liability on any person who directly or indirectly controls any person liable under Section 10(b) or Rule 10b-5, to the same extent as the controlled person.
Persons participating in an Accredited Crowdfunding Offerings can mitigate their exposure by conducting a thorough due diligence review and making appropriate disclosures to their accredited investors.
Planning for Due Diligence in an Accredited Crowdfunding Offering
The Company should undertake its due diligence review with the assistance of its securities lawyer and accountant. The parties should agree upon a strategy for review, the scope of mattes to be reviewed, the time line for completion, and whether any outside advisors will be engaged.
The Company’s securities attorney should identify any issues that could affect the company’s ability to complete the offering documents within the timeframe required. Each due diligence investigation should be customized to the particular facts surrounding the company, its business and its crowdfunded offering. While checklists are useful, they are only a starting point for a due diligence review and more often than not, additional documents are necessary to complete a proper review and prepare disclosures.
In addition to the Company’s business plan and plan of operations, a due diligence review will typically involve a review of the following and other matters:
- Material Agreements,
- Corporate Records including Articles, Bylaws, Resolutions and Minutes,
- Shareholder Records,
- Shareholder Information,
- Financial Information,
- Shareholder Voting Records,
- Corporate Records,
- Management Agreements, Biographies, Background & Compensation,
- Contracts with Customers,
- Contracts with Suppliers,
- Contracts with Manufacturers,
- Marketing Plans,
- Tangible and Intangible Assets,
- Intellectual Property,
- Impact of Environmental Laws,
- Investor Relations Providers,
- Litigation Involving the Company,
- Insurance, and
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
Facsimile: (561) 416-2855