Selling securities is serious business. It involves regulated conduct generally designed to provide investors with information about the investment opportunity and ensure that there is some accountability (liability) for the information so provided.
Companies considering selling securities pursuant to Regulation Crowdfunding (“Reg CF”) should consider, among other things:
- The cost and benefit of disclosure
There are costs associated with generating disclosure under the securities laws. These can be borne by the company raising the capital internally, outsourced to legal and accounting teams, or (perhaps more commonly) both. Companies, however, often indirectly benefit from generating such disclosures through the increased corporate maturity that tends to flow from the exercise itself. Additionally, well-crafted and thorough disclosure actually inures to the company’s benefit by indirectly increasing protections under the securities laws by reducing the likelihood of success for any claims by investors that, e.g., material information was misstated or perhaps omitted from any disclosure provided.
- Choose your intermediary wisely
Crowdfunding under Reg CF requires a company to conduct its offering on an SEC– and FINRA-registered funding portal or broker-dealer, and some state crowdfunding laws have a similar requirement. When selecting an intermediary be sure to do your diligence on platforms in advance of making any commitments to conduct your offering with a given platform or broker-dealer.
Don’t be afraid to ask the intermediary questions, as ultimately it is the company that will bear the burden of misstatements or misleading disclosure to investors. Additionally, the failure of an intermediary to comply with SEC or state securities laws could result in the loss of the exemption and liability to the company for conducting an unregistered securities offering.
- Who can help?
There is no requirement to use legal counsel in a Reg CF securities offering. Most companies, however, engage counsel because the cost of a failure to comply with the securities laws–even if unintentional–can be very high. Consider speaking with an experienced securities law attorney before offering and selling any securities. Reach out to your local regulator for potential additional guidance.
- Can you run a crowdfunding campaign and your business at the same time?
As the saying goes, securities are sold, not bought. And crowdfunding campaigns typically require many more investors than a traditional private placement to reach a target offering amount. Companies engaging in crowdfunding campaigns should be prepared to be do lots of selling, thereby leaving less time than usual to focus on business operations. Additionally, even if the offering is successful in raising the capital sought, companies may have to manage the expectations of many investors on an ongoing basis.
Note: The SEC recently proposed, among other things, to raise the Reg CF offering limits to $5 million and simplify company capitalization tables, but have not yet adopted final rules.
- What capital raising alternatives exist?