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This phrase has stayed with me since first semester of Con Law—the classic expression of subjectivity. U.S. Supreme Court Justice Potter Stewart refused to identify a set of rules or a test that would define materials as “obscene” under the First Amendment; instead, he simply explained that when it comes to “hard core” pornography—“I know it when I see it.”(Jacobellis v. Ohio, 378 U.S. 184 (1964)).
As a corporate lawyer, I hate subjective standards. Give me a yes or no answer, a bright-line test, a set of rules to follow—anything to help me advise my client on how to get the deal done with as little risk as possible. Unfortunately, despite all of the statutes written by Congress and the rules and regulations promulgated by the Securities and Exchange Commission (SEC), it is almost impossible to avoid subjective standards in the world of securities regulation. Instead of Justice Stewart's words, however, we get the all-encompassing “facts and circumstances” test.
For instance, the Division of Corporation Finance of the SEC recently published three Compliance and Disclosure Interpretations (or C&DIs) on how companies can use the Internet to conduct “intrastate offerings” under Rule 147, the “safe harbor” for offerings made pursuant to Section 3(a)(11) of the Securities Act of 1933, as amended. The C&DIs reiterated prior guidance that Rule 147 does not prohibit general advertising or general solicitation, but cautioned that offers made in reliance on the intrastate offering exemption and Rule 147 must be made only to persons resident in the state or territory of which the issuer is a resident. The guidance also noted that an issuer could use a third-party internet portal to promote intrastate offerings and went on to identify specific measures the intermediary should implement to ensure the offers are limited to the residents of a particular state or territory. (Yes! I love a checklist to follow.)
But when it comes to the question of whether a company can use its existing website or social media presence to solicit investors in an intrastate offering, the SEC goes all “Justice Stewart” on us. Due to the broad and indiscriminate manner in which issuers typically use their existing websites and social media presence, the C&DI states:
Although whether a particular communication is an "offer" of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.
So, instead of saying “No, it cannot be done,” we get a “probably not, but maybe you can do it in certain circumstances.” All of which begs the question of “Well, what are the facts and circumstances that would be ok?” What if the social media platform was able to direct the placement of the advertisements so that the ads are delivered only to residents of a particular state? Would that work? Perhaps a company could create a restricted landing page on its existing website for its offering information and implement measures to limit access to only residents of the state in which it is conducting offerings. Maybe that landing page could be password protected so that access is denied until proof of residency is confirmed.
As with any new facts and circumstance test, it is difficult to say whether any of those steps would be okay—particularly where, as is the case with intrastate crowdfunding, there is limited market practice to pull from and very little guidance from the SEC.
But it is pretty clear that to make “intrastate” crowdfunding work without an intermediary you and your advisors will need:
- A keen understanding of the rationales and principles that cause the SEC to say “we doubt it, but maybe you can convince us otherwise.”
- A firm plan for how you want (or would like) your offering process to work coupled with the ability to adapt as obstacles arise.
- Good judgment.
- An iron stomach—understand your tolerance for risk. Nothing is certain when a subjective standard is involved.
If you have questions or comments, feel free to reach me by email at: firstname.lastname@example.org.
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