Preparing for an A+ grade: drafting dull documents

Just over two weeks to go to revised Regulation A going into effect (setting aside the litigation) and time for another blog post. This time I’m looking at what an Offering Circular (the prospectus-like document that makes the offer of securities) is going to look like.

You’re going to be disappointed. It’s going to be dull. I would say “very dull” but the SEC sometimes has a problem with adjectives.

I know that the online alternative investment market that relies on Rule 506 of Regulation D under the Securities Act has been experimenting with many different types of disclosure. Videos! Pitch decks! PPMs with pictures of attractive people using the issuer’s product or service! Hyped up, enthusiastic language!

Most of this isn’t going to work in drafting the Offering Circular.

The SEC has very specific rules about the content of a Regulation A offering document (in contrast to Regulation D, where there are basically no rules other than “don’t lie”) , and there are SEC requirements and antifraud factors that affect the wording in that offering document. There are written and unwritten rules about how something must be phrased. The SEC only approves of provable, factual statements, so will object to a statement that “the company is the leading provider of widgets” unless you have proof of that leading status from an independent source. Adjectives (“the CEO is very experienced”) or vague promotional statements (“the company believes it has assembled a management team supremely capable of handling the challenges of the next year”) are going to lead to SEC objections. Graphics and pictures that don’t add to the reader’s understanding might be challenged and although the SEC doesn’t object outright to projections, any that you do use will need to be hedged with plenty of explanations and warning language.

The SEC review process involves comments from the SEC lawyers and accountants. Many comments, and you have to respond to them. You can reduce the length of time it takes to go through SEC review by conforming to standard (dull) SEC procedure.

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