For decades, private companies and investment firms have been forbidden from advertising that they are seeking investors. On September 23, however, one of the first provisions of the JOBS Act went into effect, lifting the 80-year-old ban on general solicitation of capital investments.
Many believe the result could be a large increase in businesses’ marketing and advertising their private securities offerings. Marketers should therefore be prepared to receive requests from people interested in taking advantage of the new crowdfunding provisions.
Although the lift on the ban of general solicitation may bring more business to marketers’ doors, it is critical that they understand both the opportunity and risk—for themselves and their clients.
The SEC will be watching, and there are penalties for noncompliance.
I sit on the board of CF50, a global crowdfunding think tank, and the two leading trade and lobbying organizations for the industry. When attending various events throughout the country on crowdfunding and the JOBS Act, I am frequently asked for advice regarding the campaign strategies for these types of fundraises. I always share one piece of advice: Be careful.
1. Advise caution
Entrepreneurs are known for their passion and drive. They want to share their vision with the world and they’re are eager to gain support. Although such passion is necessary for success, it can also lead to them making misstatements or omissions. The SEC may consider overestimating potential, misrepresenting someone’s involvement, and issuing forward-looking statements as misstatements.
Video is a particularly risky marketing area. For example, shooting a promotional video in a co-working space for your client’s fundraising campaign without explicitly disclosing the venue to investors could be interpreted as misrepresenting the number of employees. Another example of omission would be boasting about a large customer that’s no longer contracted to your client’s company.
2. Don’t accept success fees
The SEC determines whether an individual has acted as an unlicensed broker-dealer marketing securities by whether or not they accepted a commission. Do not accept any offers or promises such as a portion of fees dependent upon successful campaign marketing performance.
Moreover, a social media marketer whose payment is determined by performance-based statistics such as influence, reach, and engagement may be at risk. Posting about the offering on social media channels within this type of contract may appear as receiving a commission.
Until the laws are better established, the best way to stay out of trouble is to require a flat fee.
3. Avoid securities promotion and stick to marketing best-practices
At the end of the day, the way marketers connect and engage with customers on behalf of clients is the best way to help them secure funding. A business with a loyal customer base and strong branding will have a much easier time acquiring funding. Remind customers that serious investors would not choose to support a brand simply because of a rate of return offered in a tweet. Accredited investors choose strong business models with strong brands.
However, you should know the basics of the rules as they pertain to your clients. “In a 506(c) offering, businesses will be responsible for performing a certain level of ‘due diligence’ in verifying the accredited status of potential investors,” says Bob Carbone, CEO and co-founder of Crowdbouncer. “As a marketer, it is critical that you are clear that only accredited investors may invest in these deals. If you are managing social media for a company and potential investors come through those channels, you need to make sure you have a policy in place that informs them of this regulation.”
4. Ensure they consult with their attorney
The SEC will be watching vigilantly, so make sure your clients are working with an attorney or a 506(c) crowdfunding platform that understands Title II and has them correctly registered.
“Even though the proposed rules for Title II crowdfunding are not set in stone, the penalties for noncompliance can hurt a startup before it has even gotten off the ground. It is important for entrepreneurs to develop a core understanding of the SEC’s regulations and expectations before they dive in,” says Judd Hollas, CEO of investment platform EquityNet.
Plan to attend at least one legal meeting in order to have your marketing plan approved.
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Following these guidelines will ensure this boom for marketers does not turn into a bust.
Many in the industry believe that the SEC will keep a close eye on businesses doing these kind of raises. The ramifications for noncompliance could be lethal for startups, as well as for aggressive marketers that overstep the bounds of the law. If a deal falls through, all parties involved—particularly the marketing department—will most likely get called out. The best way to avoid trouble as a marketer is to ensure your clients have proper legal representation and are working with a reputable 506 (c) platform. Stick to the basics that will ultimately enable them to be more successful in the long run.