September 23rd was a great day in the history of the U.S. capital markets—the 80-year-old ban on general solicitation was lifted under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933. The JOBS Act, a piece of legislation that advocates for small business growth, was signed in April 2012 to legalize securities-based crowdfunding in two separate phases. The Title II phase opens up the opportunity for businesses to advertise fundraising publicly as long as they only allow verified accredited investors to take part in the offering.
Social media continues to flourish as brands engage their audiences on various platforms in order to generate buzz and support. When practicing general solicitation, the word you should repeat over and over is caution. Knowledge of the law, strategy and execution will be the keys to upholding your business’s image. The SEC will be attentively watching and pursuing businesses that make marketing missteps during this preliminary phase.
In order to ensure your business remains compliant while exercising Title II, pay close attention to these tips, gathered from experts throughout the industry.
Work With a Qualified Platform
One of the easiest tactics your business can employ is to utilize a 506(c) crowdfunding platform that fully understands Title II and is partnered with a registered broker-dealer. EquityNet is one of the oldest online investment platforms, and CEO Judd Hollas shared his insights on how Title II is changing the game for startups with many prominent publications—read his latest contribution to The Washington Post for more information on general solicitation.
Consult Attorneys for Marketing Material
We recommend that you exercise caution with every piece of marketing material or external correspondence leading up to and during a Title II raise. Moreover, your company should consider working closely with an attorney. The SEC will be paying particularly close attention to how businesses advertise their securities on online platforms. Have your copy thoroughly looked over before going live with any promotional activity.
Don’t List Financial Details
Although it is now legal to state that your business is looking for accredited investors, you want to maintain a reputation of professionalism and discretion. While there are no official regulations, it’s not recommended to share financial details such as returns accrued from other projects. Doing so may alienate potential investors. Remember: A rate of return offered in a tweet will most likely be unattractive to a serious, experienced investor with the ability to make a substantial contribution to your company. Familiar with the often-used line, “Past performance is not indicative of future returns?” That’s what we’re talking about here.
Verify Accredited Investors
Because all investors participating in Title II must be accredited, there are specific steps that must be followed to validate their status. Self-verification is no longer allowed. Accredited investors are currently defined as those that have an income exceeding $200,000 (or $300,000 as a couple) annually. This required verification process is one that CrowdBouncer, a provider of compliance tools for investment platforms, specializes in. The process involves plenty of documentation such as retrieving an IRS form that validates the investor’s income. There are several other forms of validation that are deemed as acceptable by the SEC as well.
Neglecting to be careful may result in serious consequences for your company or business startup. If your organization makes the decision to participate in a 506(c)/Title II capital raise, be sure that you are utilizing authorized crowdfunding resources. Moreover, consult with legal and marketing professionals familiar with general solicitation and the ongoing changes that will be occurring within the upcoming months.