Social Media Guidance Provided by the SEC

There is a great deal of angst in the securities law community about the limitations surrounding social media. Obviously the fact that general solicitation can be used at all is, as Vice President Joe Biden would say, a big f***ing deal. This means that companies can use newspaper or Internet advertisements to promote their private stock offering under certain circumstances.

However, there has been little clear guidance about what happens once a company publishes something on Twitter or Facebook, since that marketing message is no longer controlled once people can retweet or share. The lawyer concern is that the company no longer has the ability to control 1) the timing of distribution and 2) the message itself, since social media posts can be altered or commented upon by others. On April 21, the SEC gave some guidance on this issue. Nerd alert! (Don’t worry, I’ll translate to English below).

Question: Some electronic communication platforms, such as those made available through certain social media websites, permit users to re-transmit a posting or message they receive from another party. When an issuer distributes an electronic communication in compliance with Rule 134 or Rule 433, must the issuer ensure compliance with Rule 134 or Rule 433 of a re-transmission of that communication by a third party that is not an offering participant?

Answer: If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer. As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.” [April 21, 2014]

IN ENGLISH:

Question: Can a company get in trouble when it posts on social media and people start retweeting and doing crazy stuff?

Answer: No – you are fine so long as the person doing the retweeting/sharing  is truly not affiliated with your company in any way.

This SEC interpretation is very important – and the result is obvious to most observers. However, securities attorneys are rightfully cautious. Getting securities advice wrong can have devastating results for a company.
—————————————————————————-

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

An End to the Ban on General Solicitation

The rule of law has long been abandoned – especially when the rule is the Securities and Exchange Commission’s ban general solicitation for private placements. In English (and perhaps the problem is that seldom has there been even an attempt by the SEC and securities lawyers to put this in English), the ban means that a privately held company cannot ask people that don’t already have a “pre-existing business relationship” to invest in their company.

Now, of course, as a percentage of American businesses, the ones that are privately owned (rather than publicly traded) is quite close to 100%. And, frankly, the number of potential investors that these business owners have a pre-existing business relationship is also infinitesimally small. So is it any surprise that there is a complete dearth of investment in these businesses? Almost all of the capital used to grow businesses comes from banks and family members – with a large amount of that capital taking the form of Small Business Administration-backed loans.

However, a host of companies do in fact get investment through private placements with accredited investors – a geeky phrase meaning “raising money from rich people”. Now, of course, in my experience, clients seldom even realize that the ban on general solicitation is strict. They routinely ask friends and family to introduce them to third-parties that may want to invest. Interestingly, these same clients easily understand and internalize that investors must be accredited – put very basically, that the investors have income above $200,000 or assets worth more than $1,000,000.

So why ignore the rule about general solicitation? Because the ban makes no darn sense.

But both Congress and the SEC knew that there was an opportunity to fix a problem that had been created under the old regulatory scheme. The problem? Companies raising money were taking money from non-accredited investors. The “wink-wink” usually included a questionnaire where the investor attested (falsely sometimes) that they were accredited, insulating the company from any claim that the investment was improper.

So, the new rules are this:

1) Companies can “generally solicit” and attempt to raise money from anyone.

2) In exchange, the company really needs to investigate whether or not the investor is accredited. This means looking at tax returns or certifications from accountants and/or lawyers.

The new rule only applies to companies raising money from accredited investors, but it is a pre-cursor to the equity crowdfunded future where even non-accredited investors will be able to get into the action. Maybe now securities lawyers can provide accurate guidance that reflects the real world, where successfully raising money requires meeting new investors and marketing the opportunity to invest in a private company.

Sometimes it takes a few decades, but the law catches up to reality.

 

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Blog at WordPress.com.

Up ↑

%d bloggers like this: