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SEC Issues New and Revised Guidance on Intrastate Crowdfunding

Posted in Crowdfunding

On April 10, 2014, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued one revised and two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Rule 147 under the Securities Act of 1933, as amended (the “Securities Act”), which are summarized below.  Section 3(a)(11) of the Securities Act (“Section 3(a)(11)”) provides an exemption from the registration requirements of the Securities Act for any security which is a part of an issue offered and sold only to persons who reside in a single state or territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such state or territory.  Rule 147 under the Securities Act (“Rule 147”) provides a safe harbor for offerings conducted pursuant to Section 3(a)(11), which requires that the issuer must be a resident of, and doing business in, the same state in which all offers and sales are made, and the offering may not be offered or sold to non-residents.

Rule 147 does not prohibit general advertising or general solicitation (Question 141.03)

While this revised CD&I did not change substantively, the SEC Staff reiterated that Rule 147 does not prohibit general advertising or general solicitation.  However, any general advertising or general solicitation must be conducted in a manner consistent with the requirement that offers made in reliance on the intrastate exemption under Section 3(a)(11) and Rule 147 be made only to persons resident in the state or territory of which the issuer is a resident.

Use of a third-party internet portal to promote an intrastate offering does not preclude reliance on Rule 147 (Question 141.04)

This CD&I notes that an issuer claiming an exemption under Rule 147 may use a third-party internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable crowdfunding within that state if the portal implements measures to ensure that offers of securities are made only to persons resident in the relevant state or territory.  These measures must include, at a minimum:

  • disclaimers and restrictive legends which make clear that the offering is limited to residents of the relevant state under applicable law; and
  • limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (examples of an acceptable confirmation are a representation as to residence or in-state residence information, such as a zip code or residence address).

An issuer’s use of its own website or social media presence to offer securities would likely involve offers to residents outside the state, making the offering inconsistent with Rule 147 (Question 141.05)

This C&DI notes that issuers generally use their websites and social media presence to communicate in a broad and indiscriminate manner.  Therefore, although the specific facts and circumstances would determine whether a particular communication is an offer of securities, using an established internet presence to issue information about specific investment opportunities would likely involve offers to residents outside the state in which the issuer does business.