I had a great conversation with a member of the SEC Staff the other day in which he referred to the type of disclosure to be made under Regulation A as “free market disclosure.” I think that’s a great term and much better than the way I was thinking of disclosure under Regulation A, which was in terms of “non-application of the principle of ‘monopoly of the prospectus’.”
Oops, I see I almost lost you there. I was talking securities law geek language again.
The “monopoly of the prospectus” refers to the fact that, if you were doing a regular IPO, instead of a Reg A offering, you would not be able to make any statements about the offering outside the official prospectus. Everything that you say has to be in one document (the prospectus) which the SEC Staff reviews and which is subject to strict liability (ie, if you say something wrong you get sued for it, even if you didn’t know it was wrong). Remember the Google IPO? The Google founders gave an interview to Playboy and talked about the company’s prospects in the interview. When the SEC saw that (they read Playboy for the articles) Google was forced to incorporate the information in the article into the prospectus for the IPO. The “monopoly” principle has eased up in recent years (you can do something called “free writing prospectuses”) but it’s still pretty strict.
Not so with Reg A. With Reg A, you can make “testing the waters” (TTW) communications to see if it’s worth filing with the SEC and in those TTW materials you can provide any kind of information you like so long as it (a) is not misleading (you can get sued for misleading statements in TTW or any other communications) and (b) bears the SEC-required legends. Once you’ve filed an Offering Circular with the SEC, you have to give that (or a link to it) to prospective investors, but your communications aren’t limited to the contents of the Offering Circular.
Additionally, in an IPO the disclosure requirements are detailed and the SEC Staff review involves a certain amount of second-guessing as to the interpretation of those requirements. Again, not the case with Regulation A.
This means that there are no limits on the content or form of communication with potential investors. Providing the communication isn’t misleading and includes (or links to) the “official stuff,” companies can communicate with their potential investors by video, email, social media, skywriting, songs about the company or communications within video games.
The SEC Commission and current and former Staff who worked on this reg really do deserve some kudos for their flexibility here. I’m sure they’ll be keeping a close eye on this market to see how it develops, and perhaps it will even inform their views on similar interpretations in the Section 4(a)(6) (“Title III crowdfunding”) space.
Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheckprovides due diligence and compliance services for online alternative securities offerings. Its services help entrepreneurs and project sponsors through the disclosure and due diligence process, give investors the information they need to make an informed investment decision and avoid fraud and help intermediaries avoid liability. Sara’sprior position was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world.Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and as Chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process. Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves on the SEC’s Advisory Council on Small and Emerging Companies. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener and animal lover.