Understanding Reg CF Resale Restrictions
General rule: if you read the SEC rules with blinders on, you are probably well on your way to getting yourself in trouble.
Rule 501 of Regulation Crowdfunding states that shares issued in a Regulation Crowdfunding offering “may not be transferred by any purchaser of such securities during the one-year period beginning when the securities were issued,” unless the securities are transferred:
- In an IPO or another public offering registered with the SEC;
- To the company;
- To an accredited investor; or
- To a member of the purchaser’s family, a trust controlled by the purchaser, a trust created for the benefit of a member of the purchaser’s family, or in connection with the death or divorce of the purchaser or similar circumstances.
A recent blog post caught my attention where the author discussed having to enter into a binding agreement with a buyer. According to this agreement, the buyer would not pay for the shares now, and the shares would not be transferred on the company’s books until one year after the purchase. However, after that period, the buyer was obligated to pay for, and the seller was obligated to transfer their shares. The blogger believed this complied with the rule, as the shares had “yet to be transferred.”
Unfortunately for that blogger, understanding the rules requires a broader perspective. This is a resale restriction and should be understood to encompass more than just the physical transfer of shares or the notation of share ownership in the company’s books, or even the movement of funds. In this context, “transferred” should be read as “sold, transferred, or assigned.” In this case, the shares were assigned upon entering the binding agreement as the seller has encumbered the shares by granting rights to the buyer.
We see a fair amount of attempts to get around the requirements of the rules with arguments that the way something was papered complies. However, that is not going to work if someone starts pulling the thread, as the underlying economic reality of the transaction or offering structure is going to come through and be outside of the requirements under the rules.
Don’t take this as naysaying, you can do a lot with the rules as they are, and CrowdCheck is here to help keep you compliant.
Authors: Jamie Ostrow, Andrew Stephenson