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April 28, 2014Client Alert

New Compliance & Disclosure Interpretations

Crowdfunding through Internet Portals – Earlier this month, the Securities and Exchange Commission (SEC) released new Q&A interpretations related to the use of third-party internet portals to facilitate completing an offering of securities to residents of a single state. To qualify for this “intrastate offering” exemption, the issuer must meet requirements, including:

 

  • The issuer must be incorporated in the state in which it is offering the securities;
  • The issuer must carry out a significant portion of its business in that state, which is defined as at least 80% of its operations; and
  • The issuer must offer and sell the securities only to individuals residing in the state of incorporation.

 

The SEC clarified that the use of the internet to offer securities would satisfy the exemption if the third-party portal implemented adequate measures so that securities are only offered to persons who are residents in the applicable state or territory. Such measures include, at a minimum, including disclaimers and restrictive legends making it clear that offerings are limited to residents of the relevant state, and limiting accessible information about certain offerings to persons who confirm they are residents of a relevant state (through, for example, a representation of residency).

 

Further, the SEC noted that if an issuer chooses to use its own website or social media presence to offer securities, the issuer will likely be unable to rely on the intrastate offering exemption because the conveyance of information about specific investment opportunities would likely involve offers to residents outside of the state in which the issuer does business.

 

Offering Securities through Social Media with Limited Characters – Earlier this month, the SEC released a new Q&A interpretation clarifying that where companies look to communicate regarding new securities issuances to shareholders and potential investors via social media platforms like Twitter (which limit the number of characters or amount of text that can be included in the communication), for the issuer to comply with certain registration exemptions (traditionally involving the use of required specifically-worded legends), the SEC will not object to the use of an active hyperlink to satisfy such requirements in the following limited circumstances:

 

  • The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
  • Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
  • The communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

 

Where such electronic communication is capable of including required statements without exceeding the limit on characters, the SEC deems the use of a hyperlink to the required statements as inappropriate.

 

These SEC interpretations apply to communications not deemed a prospectus under Rule 134, permissible free-writing prospectuses under Rule 433, and requirements of such communication requiring a legend under Rule 165.

 

Additionally, the SEC noted that such communications, if retransmitted (by retweet on Twitter or share on Facebook) by a third party that is not an offering participant, nor acting on behalf of the issuer, and the issuer has no involvement in the third-party’s retransmission beyond its initial communication, then such retransmission will not be attributable to the issuer.

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