Some Reg-D platforms will eschew general solicitation, so AIs can self-certifyBy David M. Freedman, Contributing Writer
After September 23, accredited investors will be able to choose between Regulation-D crowdfunding platforms that (a) allow issuers to generally solicit via advertising (also known as Rule 506(c) platforms), and platforms that (b) do not permit issuers to advertise to the public. Why should that distinction matter to an investor? Because the funding platforms that choose not to allow issuers to advertise (or otherwise generally solicit) can still allow AIs to self-certify; whereas platforms that do allow issuers to advertise to the public, thanks to the SEC’s recent implementation of Title II of the JOBS Act, will have to collect or facilitate the collection of evidence sufficient to allow issuers to reasonably verify that their investors are indeed accredited.
Such evidence may be in the form of tax returns (to verify based on the income threshold) or bank statements (to verify based on the net worth threshold), or letters from AIs’ accountants, lawyers, or bankers, for example.
Note that Rule 506(c) platforms, operated for the exclusive use of accredited investors, are different from equity crowdfunding platforms under Title III of the JOBS Act. The latter will come online in 2014 (we hope), for accredited and non-accredited investors alike.
The Cost of General Solicitation: Verification of AI Status
Broker-dealers and securities lawyers who attended theCrowdfunding Professionals Association conference in Orlando on August 8-9 agreed that general solicitation is not a slam dunk. Some issuers will assiduously avoid advertising, as they already have for years, because the new right of general solicitation comes with a new cost: verifying accredited status of investors. Some feel that’s too high a cost because (a) it creates more administrative work; and (b) investors might resent the resulting invasion of privacy, and for that reason prefer the existing model of one-click self-certification.
For investors, doing business on most online platforms offering access to private placements before 9/23 has required that they simply check a box to attest that they are AIs. (To be sure, some platforms, such as SecondMarket and SharesPost, have had deeper AI verification processes in place for a while now.) After 9/23, doing business on any platform that allows issuers to advertise will require investors to submit evidence that they are accredited, such as tax returns, bank statements, or letters from their professional advisers.
Some Broker-dealers Will Wait and See
The broker-dealers and securities lawyers attending the CfPA conference didn’t venture to estimate what percentage of platforms offering private investments would and would not elect to allow issuers to generally solicit. They did say that some B-Ds may wait and see how general solicitation affects the operations and success of those funding platforms that do allow issuers to advertise before deciding whether to do so themselves.
Meanwhile, investors (and everyone else) will start seeing advertisements from many issuers after 9/23, but will probably still have the option to use platforms that do not allow advertise.
David M. Freedman is a freelance financial and legal journalist based in Chicago. Website: www.freedman-chicago.com. He thanks Vanessa J. Schoenthaler (www.qsllp.com), New York securities lawyer, for her help in writing this article.