1 Billion Angels

Integration of Reg D and Crowdfunding Offerings, Proposed Safe Harbors

In my last post, Crowdfunding and the Rise of the Super Angel, I discussed the uncertainty around whether a Reg D offering and a crowdfunding offering could take place simultaneously, without integration.  As a result of this, I submitted the following comment to the SEC suggesting certain safe harbors to provide clarity on the situation.

If you agree or disagree, tell the SEC by clicking here.

What other safe harbors should the SEC consider?

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Dear SEC Staff:

Subject: Safe Harbors Regarding Integration of Reg D and Crowdfunding Offerings

Under the JOBS Act, a Reg D offering under Title II may now take advantage of general solicitation so long as all purchasers are accredited investors.  Under Title III (Crowdfunding) of the Act, general solicitation is prohibited for crowdfunding transactions.

If a Reg D offering with general solicitation is conducted simultaneously with a crowdfunding offering, then it is possible that the general solicitation will be seen by the crowdfunders and sales will occur to unaccredited investors, apparently busting both exemptions.

Section 302(b) of Title III states that “Nothing in [the Crowdfunding exemption] shall be construed as preventing an issuer from raising capital through methods not described under [the Crowdfunding exemption].”

In order to clarify this apparent contradiction, the SEC should adopt certain safe harbors to allow for simultaneously or sequential Reg D and Crowdfunding offers without integration consistent with the intent of the legislation. 

1) A Reg D offering and Crowdfunding offering should not be integrated if no general solicitation takes places.

2) No integration if a crowdfunding offer closes prior to any general solicitation related to a Reg D Offering.

3) No integration if a Reg D offering and crowdfunding offering occur simultaneously, if the offerings have the same economic terms and:

• the size of the Reg D offering to accredited investors is greater than the size of the crowdfunding offering (useful for VC follow-on rounds); or
• the amount invested by sophisticated investors in the Reg D offering is at least 10% of the total size of the crowdfunding offering within the same 12 month period (this would be useful for Super Angel led rounds).

An example of such a scenario would be where a venture capital round is closed and the Company would like to offer its customers or the public the opportunity to participate in the Company.  The dangers of fraud where investor rounds are dominated by accredited investor or led by sophisticated investors are minimized because these investors will have conducted appropriate diligence and negotiated market deal terms, all of which will serve to protect the crowdfunders.

Without further clarification on this issue, issuers will be forced to wait 6 months between Reg D offerings and crowdfunding offers to avoid potential integration and the resulting violation of  both exemptions.  The above proposed safe harbors balance the two exemptions and will allow issuers to raise capital with certainty, while maintaining the investor protections intended in the Act.

**For additional coverage on this topic, I would recommend the 4th paragraph of this article at http://www.crowdsourcing.org/editorial/more-on-how-crowdfunding-unrolls-in-the-us/13391 and my blog post at http://1billionangels.com/2012/04/19/crowdfunding-and-the-rise-of-the-super-angel/.