Understanding Reg CF: Keeping your “backers” informed

One of the best practices that has developed in the realm of donation/reward crowdfunding is to provide regular updates to campaign backers over email in addition to publishing them on the crowdfunding platform. These updates are important — they keep backers informed about the status of the campaign, and provide information about company events relevant to the success of the idea. When it comes to Regulation CF, however, this practice can’t be adopted for equity backers (otherwise known as investors) in exactly the same manner as for donation/reward crowdfunding.

Title III of the JOBS Act is not very friendly to communications being made by individual issuers. Specifically, the JOBS Act says that companies may “not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker”. This language is a bit ambiguous, but the intent is clear. Congress does not want issuers to be able to send out communications touting their offerings that only provide selective information about the offering. The SEC codified these restrictions into Rule 204 of Reg CF, which sets out specific content limits on any communication which directly or indirectly identifies the terms of the offering. (This is the “tombstone rule”.)

A backer update will necessarily identify the terms of the offering directly or indirectly and must comply with Rule 204. And the full scope of the information that best practices dictates in a backer update goes way beyond what can be included in a tombstone communication under Rule 204. So what is an issuer left to do?

To answer this, we have to go back to Congress’ and the SEC’s understanding of how to ensure investors are fully informed about the company in which they are investing — specifically that all information is contained within the company’s offering page on the intermediary’s platform. Special email updates, outside presentations, interviews with media, analyst phone calls — none of this is allowed unless it occurs on the intermediary’s platform and is openly accessible by everyone, not just registered users. The same goes for backer updates. Updates may be done regularly and posted to the intermediary’s site for everyone to see, not just backers. Backers may receive direct emails from the issuer, but only to the extent that those emails say an update is available (and nothing else), and direct backers to the intermediary’s platform.

Bear in mind, there is still a regulatory requirement to provide backers and prospective investors with updates. Under Rule 203(a)(3) issuers are required to file progress reports with the SEC and make those reports available to investors when the company has reached 50 percent and 100 percent of its target offering amount. While this requirement is important for ensuring a standardized amount of information is available about an offering, it would likely not meet the demands of backers who would like regular updates.

When Reg CF goes live on May 16, it can be expected that there will be a lot of questions about what is and what is not allowed. That said, when it comes to communications, it is clear that the regular communications and media blitzes associated with successful donation/reward crowdfunding campaigns are not allowed.

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