“Free market disclosure” under Regulation A

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.

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