The internet has gone through radical changes since the year 2000. Google became a verb, Facebook became a thing, cat memes come and go every 5 minutes, and everyone has their own blog (just like this one!). What has not changed since the year 2000 is the Securities and Exchange Commission’s opinion on what constitutes a public offer of securities over the internet (which is the same opinion the SEC held before there was even an internet to make offers on).
Way back in the year 2000, the SEC addressed the use of the internet through an interpretation of the rules currently in place as they apply to electronic media. At that time, 7 million people had accounts with online securities brokerages. Now, the three largest online securities brokerages have over 17 million accounts.
For issuers, the internet has vastly increased the available pool of potential investors to include anyone around the globe with an internet connection. Broker-dealers and specialty offerors, such as USCIS Regional Centers that publish EB-5 Investment Visa offers, use the internet to reduce the transaction costs of finding accredited investors and eligible foreign investors.
Investors have also driven the increased use of the internet to offer and sell securities. Investors appreciate the ease of accessing information as well. Rather than sifting through a stack of papers, an investor can become fully informed after studying the offering materials presented in a digital format.
Indeed, the advance in communications afforded by the internet was a primary driver behind Title II of the JOBS Act—which will allow for general solicitation of securities offers to accredited investors. However, until those rules are in place, the SEC’s year 2000 rules on use of the internet to offer securities are still the rules of the road.
One fundamental principle still in place is that offers made only to accredited investors are exempt from registration because they are considered “private” offers of securities. But an offer cannot be “private” if it is made publicly. The year 2000 rules clarified that an issuer’s unrestricted (not password-protected) web page is considered publicly available. As a public offer, the offering of the securities is not exempt from the registration requirement of the Securities Act.
Why does this matter? Well, if an offering that should be made privately is made publicly, then the issuer and anyone selling the securities are violating Section 5 of the Securities Act. If a Section 5 violation has occurred, the investors have the option to rescind their investments and get their money back. The resulting lack of funding could sink the issuer company. Additionally, Section 5 violations could impair the issuer’s future ability to finance the company through offerings of securities.
All in all, issuers are best advised to avoid violating Section 5 of the Securities Act. The SEC advises that use of a password-restricted offering page after certifying accredited investor status would suffice to maintain the exemption from registration. Seems like an easy enough solution to avoid the parade or horribles that could result from a Securities Act violation.