Sounds so disreputable, doesn’t it? But some of the SEC rules that apply to stock touts apply to several types of activity in the new online markets.
Back in Ye Olden Tymes (the tech bubble days of the late 1990s) the SEC’s newly formed internet task force brought 23 enforcement actions against 44 companies and individuals in one epic event. All 23 cases involved allegations of illegal touting of securities under Section 17(b) of the Securities Act.
This is what Section 17(b) says:
It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.
Note that there’s no reference to lying about the stocks, or any outright “pump and dump” type fraud. Pump and dump cases were common in those pre-506(c) days, because manipulating microcap stock was where the money was.
Now, however, with Rule 506(c) permitting general solicitation, it is possible for a wide range of functions that are perfectly legitimate in themselves to raise 17(b) concerns.
Read the language of the section carefully. If you are taking money from a company or anyone acting for it to publish or circulate information that “describes” (not even promotes, touts, or otherwise hypes or recommends) a security that is for sale, you are violating Section 17(b) if you don’t disclose fully that you are being paid to do so. Full disclosure means amount, source and type of compensation. We are hearing that the SEC may not necessarily regard a link to a place on a website that contains a description of fee arrangements as being full disclosure. Accordingly, and to avoid risk, the disclosure should be clearly made in the actual communication, whether it’s an email, an article or a company’s profile on an investment platform.
And let’s be very clear that we are hearing that the SEC is interested in this area.
Here are some of the entities that should be talking to their lawyers about whether they need to make Section 17(b) disclosure:
- “Investor relations” firms who promote stock offerings for a fee.
- Non broker-dealer investment platforms acting as “bulletin boards” or “matching services” if they charge a fee for their services.
- Magazines or publications (print or online, or websites) who charge companies or their agents a fee to feature information about an offering of securities.
- Anyone publishing research reports for a fee to be paid directly or indirectly by the issuer.
- Advertising or marketing agencies offering to help Rule 506(c) deals reach a wider audience.
- Organizers of conferences where entrepreneurs “pay to pitch.” It may be possible to structure such pitches so that the “means of interstate commerce” are not used for communications that describe offerings, but this will require careful planning.
Some of these activities also give rise to questions of whether someone needs to registered as a broker-dealer. That’s a separate question and even though you may not be required to register as a broker or an investment adviser you may still be subject to Section 17(b). There will doubtless be more to come on this issue.
As always, this isn’t legal advice.
CEO/Founder, CrowdCheck, Inc.
Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. Her position prior to founding CrowdCheck was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP), which was chaired by now-Senator Elizabeth Warren. Sara brings a wealth of legal expertise in securities and start-ups to the emerging marketplace for crowdfunding and other online offerings.