Some folks, especially traditional securities lawyers, have recently been startled by flashy ads on the TV and radio for offerings of securities, specifically Regulation A securities in start-ups. We’ve had a number of calls, and there have even been some newspaper articles, asking “They can’t do that, can they?”
This is not the stuffy old traditional IPO world. This is Reg A, dudes and dudettes, where the rules are different and any start-up company that can afford it (ha!) can make sizzling ads that send potential investors rushing to buy their shares.
Provided they comply with two simple rules (and watch the timing because the rules change once the offer is qualified).
First, don’t lie. Or make any misleading statements at all. This may be more difficult than it seems because the company wants to attract the attention of potential investors and not to spend any precious eyeball time on a recitation of risks. Don’t be tempted to stuff all the health warnings in one of those fast-talking jabbers at the end of the ad. Be honest and balanced about what the offering entails. Maybe even start off with “You might lose all your money if you invest in us…” No? Well, you get the general idea. Make sure your lawyers sign off on both the script and the visuals (please do not toss currency of any kind around in the ad). And if you are using a broker, make sure you run the advertising idea by them before you even start filming, because brokers must approve all your advertising and most compliance officers I know won’t let you do this and will likely drop dead on the spot if you suggest it.
Second, don’t forget your “legends and links.” If you are doing the ad as part of your “testing the waters” (expensive way to test the waters, though) then you need to include the SEC’s “No money…” legend, and once you’ve filed an offering statement with the SEC, you also need to provide the offering circular, which we mostly do online through a link. “But wait,” I hear you say, “how can I link to anything from a TV or radio ad?” Or, for that matter, from billboards, electronic billboards, print media and anything that isn’t clickable?
The answer depends on where you are in your offering. Before your offering is qualified by the SEC, you are pretty much unconstrained by the type of media you use. Social media, broadcast media, print. After qualification, it gets more restricted.
The rule that relates to delivery of an offering circular before qualification requires that testing the waters materials be accompanied by the most recent offering circular or contain a notice informing potential investors how they can get it. That rule says the notice can state from whom the offering circular may be obtained, including phone and address of such person, or a URL where the offering circular may be obtained.
So applying these requirements to broadcast and print communications, we suggest that the following might be appropriate best practices for the delivery of offering circulars pre-qualification:
TV: With TV, you’ve got several options. We think a chyron that reads something like “Read the offering circular before you invest--[URL]” is the best idea. For preference run the chyron the entire time the ad is running and you should consider flagging the riskiness of the investment as well. You could also have text come up at the end of the ad with the same language. Make sure that the text is exposed for long enough that a normal person has time to read it, and grab a pencil or their phone to make a note.
Radio: Have the URL read out clearly (and slowly), more than just once. Tell investors to read it before investing.
Electronic billboards and similar: Follow the TV rules if you can but some of these media are space constrained; include the “Read the offering circular before you invest--[URL]” message in a prominent location, or in the case of messages that consist of scrolling text, include it several times.
Print media: This is easier. Just include the URL in a prominent place. Tell the investors to read the offering circular.
One important note with respect to the URL: it should actually take the investor to the offering circular. Not simply to your “invest now” page, with the offering circular somewhere way down the page where the investor will have forgotten what she was looking for by the time she’s finished scrolling. For pre-qualification purposes, we don't think it's a problem if the URL directs to the main offering page or an “invest now” landing page, provided the offering circular is clearly presented to the investor as soon as she lands there, but post-qualification we understand the SEC Staff thinks the link should be directly to the offering circular.* You’ll also want the URL to be short and easily remembered, but you have every incentive to do that anyway, as you’re probably going to be directing the investors to the site where they can eventually give you money.
Post-qualification, the rules change. After the company’s offering statement is qualified by the SEC, written offers (and a TV or radio ad is a written offer; I’ll explain that another time) must be “accompanied or preceded by” the most recent offering circular. How is the offering circular supposed to get into the hands of the investor? The rules that require such delivery post-qualification don’t say, but the SEC Staff pointed us to this interpretive release from 1995 which deals with delivery of prospectuses for fully-registered deals, where there are similar rules. Example 15 in that release discusses the use of sales literature (securities advertising) which is required to be preceded or accompanied by an offering document. The release says if there is a hyperlink in the sales literature that allows the offering document to be “viewed directly as if it were packaged in the same envelope as the sales literature,” that’s good delivery. The Staff is not going any further than that. A live link is good delivery, mere notices aren’t, and you can argue all you like that with the technological changes since 1995 a URL that you can enter into your phone (or even click on a QR code) as you watch the telly is the technological equivalent of a live link, but right now it’s not.
So where does that leave post-qualification communications? Obviously, anything with a clickable link that takes the reader to the offering circular is OK. TV, radio, billboards, skywriting and good old fashioned print media are not. That means that you can’t even print a “tombstone” in the Wall Street Journal the way that you can in IPOs unless the rules that let that happen in IPOs are extended to Reg A. Interviews with journalists are also going to be a problem, because you will have set them up (so you are responsible for their content) and even if you just try to focus on discussing your company, journalists will ask about the offering and you are going to spend a lot of time saying “no comment.”
It’s super-disappointing, because if we’ve learned anything about Reg A, it’s that the old saw “securities are sold and not bought” is still true and the Reg A market needs marketing. Early-stage companies needs to be able to reach as many investors as possible, and many of our clients tell us that print and broadcast media are the most efficient way of accessing the older, richer, demographic that they need to reach (millennials may live online but they spend more on avocado toast than they do on investing).
So how do we make this marketing possible? CrowdCheck’s planning a rulemaking petition; contact me at firstname.lastname@example.org to learn more and lend support.
*This sentence updated August 14 to reflect Staff position.