Once again, my AI image generator has created the image above based on the title of this article that includes “words” and images that one only expects to see when ingesting magic mushrooms. And don’t look too closely at the hand holding the Reg CF book unless you want to see a “thumb” that has traveled to the wrong side of the hand.
Part Three of a Six Part Series Comparing Regulation A and Regulation Crowdfunding. See Part One Here and Part Two Here.
There is nothing more important to the success of a Reg A or Reg CF offering than getting the investment opportunity in front of potential investors. In the investment banking world, this is often called “distribution.” In the world I live in, I call it marketing. How can a company get their offering in front of enough people to raise the amount of capital the company needs?
I could write an entire book on this topic. I’ve seen companies raise millions by simply sending an email blast to their existing customers and fans. I’ve also seen the opposite where companies spend a lot of money on marketing and do not see much of a return on their ad spend.
While there is no “one-size-fits all” answer to how to market or get distribution of a Reg A or Reg CF offering, this article will explore the legal aspects of marketing a Reg A or Reg CF offering. Some day in the near future, I’ll share some of my own best practices for the nuts and bolts of marketing that I have seen work with my clients. But for now, let’s stick to the laws surrounding marketing of securities, and how the rules for Reg A and Reg CF are very different. Reg CF has some built in limitations on marketing that are frustrating to say the least, and these limitations do not apply to Reg A.
Legal Limitations On All Equity Crowdfunding Securities Offerings
All securities marketing (even outside of equity crowdfunding) is subject to the requirement of being truthful and not misleading – this is part of the antifraud provisions of federal and state securities laws. In a nutshell, this means that you and your company may be held legally liable for false or misleading statements that you or anyone on your behalf makes regarding your company, the securities you are selling, or the securities offering itself. This applies whether the statement is made in writing, orally, in the media or digitally.
Here is why securities lawyers like me take this so seriously. The SEC, the Federal Trade Commission, state securities regulators and others enforce federal securities laws through criminal, civil and administrative proceedings. Also, investors or other private parties can bring legal action against you and your company under some securities laws. Being truthful and not misleading investors in all securities marketing is not optional, it is a necessity to avoid major legal problems.
When preparing marketing materials, it’s not a time to be cute or to think that a careful wordsmithing of your marketing language is “technically” not a lie – or that it “could be interpreted to be true.” Before any marketing material is used in any securities offering, ask yourself if a regulator at the SEC or at any of the 50 state securities departments might find it even somewhat misleading. If so, do not use that ad.
Pretend you are the securities regulator. Now, add in that the regulator is having a bad day. He couldn’t sleep the night before and woke up with a migraine. His car wouldn’t start and he found out he needed a new alternator. He has a root canal scheduled for later that day. And right before he reads your ad, he just got yelled at by his boss and he spilled his coffee on his shirt.
Now read your ad from his perspective. If you can see how what you planned to say could be interpreted as misleading by the pissed-off bureaucrat who is ready to take out his frustrations on somebody, don’t use it.
And even if you are convinced the ad is still okay... have your securities counsel review it to get a legal opinion that could save you a lot of trouble and money..
Balance
If you are going to say something positive about the offering, you should balance it with the opposite side of your positive message.
This need for balance is an inexact science. It’s not enough to say put a tiny font disclaimer at the bottom of an ad after promising a 500X return on your securities. If you tout anything about your investment opportunity, you should add language that is equally prominent about the complete opposite of what you said that was positive. For example, if your ad says, “We plan to give investors a return by going public in 3 years” you should to balance it with something equally negative like “We may be bankrupt and you may lose your entire investment in 3 years.”
Given this need for balance, it is better to not make any promissory statements in ads at all, or you will be forced to destroy the effectiveness of positive messages with harsh negative ones.
As I always tell clients when it comes to marketing - just stick to the facts. Tell the truth at all times. And make no promises about how the investment will perform.
Reg CF only: No Marketing Of The Terms Of The Offering Except On The Funding Portal or Broker-Dealer Website Where The Securities Will Be Sold
If I haven’t scared you away from marketing at this point (hey, it’s not as bad as it seems – just be truthful at all times and you will be okay) now let me make it even more complicated for Reg CF offerings. These rules I’m about to discuss do not apply to Reg A offerings. And frankly, these Reg CF rules are one of the reasons I always prefer Reg A to Reg CF where marketing is going to make or break the offering.
When Congress created Regulation Crowdfunding, they wanted to be fair to potential investors and to attempt to give all investors the same information about the Reg CF investment opportunity. As a result, they mandated that there had to be only one place that an investor could access certain information about the Reg CF securities offering: the funding portal or broker-dealer website that hosts the offering. Seems reasonable – in theory. But the way the Reg CF marketing rules are written, they tie the hands of any marketer in a way that Reg A does not.
For a Reg CF offering page on a funding portal or a broker-dealer website, you can follow the rules above and as long as you are truthful, not misleading and have balanced marketing, you should be okay. But for marketing and communications not on the funding portal or broker-dealer website, you cannot market using the “terms of the offering” unless you only run a boring “tombstone” ad
Whether you post on social media, send out e-mails, add pages to your company website, speak at an event, do a podcast or media interview or do any other kind of communication related to the Regulation CF offering (not on the funding portal or broker-dealer website where the offering is hosted) you cannot mention the “terms of the offering” except if given in very plain, non-descript and dull terms. Think of the announcements/ads you have seen in the Wall Street Journal from investment bankers. It’s not the kind of thing that is going to get your Instagram audience excited.
What Are “Terms Of The Offering?”
“Terms of the offering” under Regulation CF are:
1. The amount of securities offered in your Regulation CF offering,
2. The type of the securities, such as whether they are equity, debt, common, preferred, etc.,
3. The price of the securities offered,
4. The closing date of the offering,
5. The use of proceeds for the offering, and
6. Your progress towards meeting your funding target.
If any of these are included in your marketing or communications off the funding portal or broker-dealer website, you have violated Reg CF. You can, as mentioned above, freely discuss these matters on the funding portal or broker-dealer website where the offering is located.
What Is A “Tombstone” Communication?
You are allowed to use “tombstone” communications and marketing off of the funding portal or broker-dealer website, and these may include the terms of the offering. Tombstone ads, posts and communications are generally very boring – they contain a very limited set of facts and often do not have graphics, photos or other visual enhancements.
Regulation CF specifically allow for tombstone “notices” limited to the following, in either oral or written form:
1. A statement that you are conducting an offering pursuant to Section 4(a)(6) (which is Regulation CF) of the Securities Act;
2. The name of the intermediary (funding portal or broker-dealer ) through which the Regulation CF offering is being conducted and any such in written communications - a link directing the potential investor to the funding portal or broker-dealer website;
3. The terms of the offering (see above); and
4. The name of the issuer of the security (your company), and its address, phone number and website, plus the e-mail address of a representative of your company and a brief description of your business.
Despite the unpopularity of tombstone posts for Reg CF, if you choose to use them for any reason, please keep in mind the following:
You don’t have to include any or all of the terms or information from the list above. You can post some or all of the list.
You should list the link to the funding portal or broker-dealer website offering page, but don’t include links to your own website or any other site.
Your business description must be concise. Most experts apply IPO rules here as to what is allowed – but the SEC has not provided direct guidance on this as related to Regulation CF. Following IPO rules, you should be able to describe your common activities, your main products or services, and your industry segments. Avoid detailed information on how your product works for the overall market.
Never use recommendations, reviews or testimonials from any source.
Tombstone ads may be posted on social media, published in magazines or newspapers, broadcast on TV, streamed online, and included into Google or Facebook ads. There is no limitation of where tombstone ads may appear.
You may legally use graphics and images in tombstone communication. Only use images you have permission to use and be careful about using stock images that could be misleading. Images of your actual products, your real employees at work, your office, etc. are permitted, but be very careful that they could not in any way be considered misleading. The reality is... the more you stray from simple text, the more likely that the regulator who had a bad day is going to say you violated the “terms of the offering” rules.
In all cases, you should have your legal counsel review the tombstone communications to be sure you are complying with the restrictions of Regulation CF.
And remember, if you use Reg A instead of Reg CF, these rules do not apply and you can freely use the “terms of the offering” in your Reg A marketing materials.
Does This Mean I Can’t Market My Reg CF Offering On Social Media, Online, Or By Email?
This is one of the misconceptions about Reg CF. The fact is, you can market the Reg CF offering anywhere as long as (a) you follow basic securities laws marketing rules and (b) you do not mention the terms of the offering unless it is a boring tombstone ad.
Most Regulation CF issuers don’t run tombstone ads. They are not effective at marketing in my opinion, and most people agree. As a result, most Regulation CF marketing off of the funding portal or broker-dealer website offering page does everything it can to market the securities offering effectively, while carefully avoiding any mention of the terms of the offering.
In you are marketing off of the funding portal or broker-dealer website, you can talk about the offering any non-misleading way that you want as long as you don’t mention the terms of the offering. For example, you can say you are holding a securities offering, but cannot say exactly what securities you are offering – you must direct the possible investor to the funding portal or broker-dealer website offering page to see the exact terms.
Be very careful about linking to any other website that may contain the terms of the offering. For example, if a blogger does a profile on your Regulation CF offering and mentions that you are selling common stock for $10 per share, you cannot link to that article on your social media because it contains “terms of the offering.” To the SEC, that link may be considered a communication of the terms of the offering, even if it is on someone else’s site.
You can’t always control what the media or bloggers or random social media posts from unrelated people will say about your company (which may include) posting the terms of the offering on their platforms, and you have no duty to stop them from doing so. But you do have a duty to review their posts or articles and to not link to them if they contain terms of the offering. You can quote other parts of the article, and use the other parts of marketing, just don’t add a link or quote the part including the terms.
Many Reg CF offerings use “influencers” to spread the word. If you are compensating the influencer in any manner, they are not independent of you. As a result, what they post cannot contain the terms of the offering either. Same with anything else your company has control over – press releases, your company’s social media, etc. If you can control it, or if you are paying for it in some way, then you cannot mention the terms of the offering.
I’ll end this article by repeating myself: None of these “terms of the offering” rules apply to Reg A offerings. If there is one really big reason to consider the additional expense and time of a Reg A offering over Reg CF, it’s these restrictive marketing rules.
Coming next week: Part 4 of the 6 part series: Online Investment Websites and Platforms. Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.