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October 24, 2016 | BusinessFrom the blog

Equity Crowdfunding: Don’t Blab (Part 1)

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Hey there Madam / Mr. Entrepreneur.  Congrats!  You’ve got your start-up up and running and you’re ready to go with your amazing new business!  Of course, you need capital to make the dream real and you’ve already asked all your friends and family to chip in and invest.  Your buddy who went to business school introduced you to a great option: equity crowdfunding.  But before you dive right in and tell your whole #squad, remember the following:

What is Equity Crowdfunding?

Not to be confused with crowdfunding campaigns that simply raise money for a cause or project (e.g., Kickstarter or GoFundMe campaigns), equity crowdfunding, a.k.a. crowdinvesting, is a way for companies to sell small ownership interests in themselves to online investors in exchange for cash.  This process is called making an “offering.”

Companies can raise up to $1 million through a crowdinvesting offering, but they must adhere to special rules put in place by the Securities Exchange Commission (“SEC”), including those about what they can say about their offering, and when.  These regulations aim to protect investors from companies that might misrepresent the expected risk or reward involved in purchasing ownership interests in their company.  Failing to adhere to these regulations could land a company conducting an equity crowdfunding offering in hot water.

Watch What You Say Before Making the Necessary Filings

The rule of thumb is not to publicly mention your crowdfunding campaign before filing your Form C (the form that initiates the equity crowdfunding process).  The SEC wants to control the information that a company communicates about both itself and the offering.   Before filing a Form C, a company may not be subject to SEC regulation, and may (purposefully or not) use this window to mislead potential investors – that’s why talking about your offering too early is called “gun-jumping.”  So how do you avoid it?

The recommendation is simple:  Don’t mention your equity crowdfunding campaign to the public. That means, you shouldn’t:

  • make any public announcements,
  • hint at an upcoming equity crowdfunding campaign during your next conference, or
  • discuss your crowdinvesting plans with potential investors.

Where things start to get tricky is in your seemingly normal advertising right before you launch your equity crowdfunding offering.  The SEC prohibits ramping up any advertising, including advertising that does not mention the equity crowdfunding campaign, directly before the offering.  The SEC considers this “conditioning the market” to artificially raise public interest in your company.  If a company ramps up its advertising right before an offering, it may mislead potential investors to believe the company is more successful than it actually is.  Once you do file your Form C, however, you are free to advertise as much as you want.  Patience, young grasshopper.

What Can You Say After Filing Your Form C?

Okay, so you kept a lid on your plans until you filed the Form C. Now you can tell the world, right???  Not so fast.  Generally, you may communicate with the public about your offering as long as it does not mention any of its terms, including:

  • how much equity the company is selling;
  • general information about the interests being sold;
  • the purchase price; and
  • the last day to buy.

If you want to let potential investors in on the terms of the offering, refer them to your company’s official offering page on your crowdfunding portal.

As always, you may want to consult an experienced business attorney.  They can walk you through your financing options, guide you through the equity crowdfunding process and safeguard your company from potential failures in complying with SEC regulations.

For ways to get the word out about your equity crowdfunding, check out Part 2 of our series.

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