Equity Crowdfunding Publicity, Or What Not To Do

Rules on marketing and advertising your equity crowdfunding campaign are more restrictive than you think.  Startups accostomed to blogging your every thoughts and feelings beware.

When the SEC adopted the crowdfunding rules under Regulation CF, it included severe restraints on a company’s ability to publicize its crowdfunding campaign.  Many people think the SEC allows general solicitation and it applies to everything.  Wrong.  It does not apply to crowdfunding.

You know those cool tombstone ads in the Wall Street Journal showing off an IPO?  That shows the type of information that your crowdfunding notices can include.

A crowdfunding advertising is limited to:

  • a statement that the issuer is conducting a crowdfunding offering in reliance on section 4(a)(6) of the Securities Act of 1933
  • the name of the platform
  • a link directing the investor to the intermediary’s platform;
  • the terms of the offering; and
  • factual information about the legal identity and business location of the issuer, limited to:
    • the name of the issuer of the security
    • the address of the issuer
    • phone number of the issuer
    • website of the issuer
    • the e-mail address of a representative of the issuer and
    • a brief description of the business of the issuer.

The description of the terms of the offering must be limited to:

  • the amount of securities offered;
  • the nature of the securities;
  • the price of the securities; and
  • the closing date of the offering period.

That’s it.  Some short bullet-pointy info dots.

There’s no “this is the Internet and I can say whatever I want.”  There’s no “This is the new world and old rules don’t apply.”

Is it limiting?  Yes.

Is there a reason?  Yes.

As with public offerings, there is a required disclosure document, in this case Form C.  The SEC wants to make sure you have access to it before you make an investment decision.  The SEC does not want a hyped-up ad to entice you to purchase before you have the ability to review 50 to 100 pages of required disclosure.

Any good news?  Well, the company does not have to file the notices with the SEC.  The company is not limited to newspapers.  The notices can go anywhere, such as social media or the company’s website.

Also, the company can communicate with investors through the crowdfunding platform.  The SEC believes that this ability will facilitate the wisdom of the “crowd” in crowdfunding.  The company must identify itself as the company and not as “Random Guy Who Believes Company Will Be the Next UBER x Google.”

Old timey Ford tombstone. Crowdfunding companies need to get used to this.
Old timey Ford tombstone. Crowdfunding companies need to get used to this.

Shopify Shows How Silicon Valley Corporate Governance Structures Spread and Become the Norm

Shopify IPO documents outline corporate governance strategies with concentrating voting for insiders.

Shopify filed for an IPO.  It is raising around $100 million (a placeholder figure), but it is too early to know exactly how much of the company this represents.

Shopify Logo
Shopify IPO reveals dual class voting structure.

We do know that Shopify is implementing a dual share voting structure similar to many other tech companies.  While corporate governance activist types decry these types of arrangements, even a Canadian company knows how to protect the voting rights of its insiders.  Proponents say these structures allow for longer term thinking and innovation.

Currently, officers and directors control about 56.5% of the voting rights, with CEO Tobias Lutke holding 14.62%.  The 56.5% number is skewed because this includes investor nominees to the board, including Bessemer Venture Partners (30.3%).

The voting rights will be split up between Class B shares with 10 votes per share and the publicly held Class A shares with 1 vote per share.  The prospectus outlines the risk of concentrated voting.  However, it is not really a risk.  It is the point.

“In addition, because of the 10-to-1 voting ratio between our Class B multiple voting shares and Class A subordinate voting shares, the holders of our Class B multiple voting shares, collectively, will continue to control a majority of the combined voting power of our voting shares even where the Class B multiple voting shares represent a substantially reduced percentage of our total outstanding shares. The concentrated voting control of holders of our Class B multiple voting shares will limit the ability of our Class A subordinate voting shareholders to influence corporate matters for the foreseeable future.”

 

 

More Big Tech Companies Stay Private, Or Wait Longer To Go Public

The Wall Street Journal took note that many companies with high valuations prefer to stay private these days.  Mostly, it is talking about the types of tech companies that went public much earlier in their life cycle in the late nineties.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

The article mostly deals with how investment bankers more used to IPOs are dealing with large companies that prefer to raise money privately.

For most people, the woes of investment bankers struggling to meet changing business conditions is not particularly interesting.  However, what I find interesting is the assumption that these companies would necessarily want to go public.  If you don’t have to, why would you subject yourself to periodic reporting, plaintiffs’ lawyers in the securities bar, Sarbanes-Oxley, etc…?

In addition, the universe of investors for private companies is expanding.

Banks trying to woo more private-placement clients said they provide a needed service. Companies are staying private longer partly because the number of investors interested in private deals has expanded significantly, they said.

Many of these companies are also less dependent on funding from the public markets.

“What’s changed is that companies are getting so quickly from startup to real traction,” said Dan Dees, global head of technology, media and telecommunications banking at Goldman. “You can’t just wait for the IPO pitch.”

And yet, this is what critics used to complain about for IPO companies:  they were too immature for the public markets.

To me, it still comes down to an essential question for the issuer:  Why do you want to go public.  Because ‘go’ is only a part of it.  ‘Being’ public is the long-term expense and obligation.

SEC Issues Stop Order For “IPO”

Here’s something you don’t see everyday.

Typically, when going through the SEC registration process, you file a registration statement, the SEC comments, you respond and file an amendment, lather, rinse and repeat until all comments are resolved and the issuer is ready to go effective.

However, the SEC can issue a stop order to prevent the use of a registration statement if the registration statement is somehow deficient. This brings us to Counseling International, Inc.

Counseling International originally filed a Form S-1 in August 2012. It filed various amendments through June 2013. There does not seem to be an order declaring it effective, and the comment letters and responses are not yet posted on EDGAR (which occurs some time after effectiveness).

It seems to be a stretch to call this an IPO as the Form S-1 covers the resale of the shares by selling shareholders, there is no underwriter, there is no securities exchange listing and the company’s assets consist of about $21,000.  However, it is the initial filing by a non-reporting company.

On August 22, 2013, the SEC issued a stop order after it determined that the registration statement contained false and misleading information, identified by the SEC as:

  • failure to disclose the identity of control persons and promoters; and
  • false description of the circumstances of the departure of the former chief executive officer.

The prospectus provides the following language, which we guess missed some crucial details:

“The Company was founded by Layla Stone, who served as the director and chief executive officer of the Company until she sold all of her equity interest in the Company to Maribel Flores on October 19, 2012, and resigned from such positions on the same date. On October 19, 2012, Ms. Flores became the sole director and officer of the Company.”

Until the comment and response letters are posted, it will be difficult to know exactly what went on, but it must have been a serious situation for the SEC to take this drastic measure. How drastic, you ask?

First, the registration statement had a typical delaying amendment, so it would not have gone effective without SEC action in any case.

Second, Counseling International agreed to penalties, which include ineligibility to conduct a Rule 506 offering for five years or occupy any position with, ownership of or relationship to the issuer enumerated in Rule 506(d)(1). [Ed. Note: This second clause seems to apply to an individual, but the “Respondent” described in the stop order seems to be limited to Counseling International. Please let me know in the comments if I just missed something, but I had trouble making sense of this. It may be a boilerplate clause, but it is difficult to tell from the stop order document alone. The press release only refers to the ineligibility for the use of Rule 506 as a penalty.]

The SEC had the following to say, which highlights how they viewed the situation:

“Rarely do we have the opportunity to prevent investor harm before shares are even sold, but this stop order ensures that Counseling International’s stock cannot be sold in the public markets under this misleading registration statement.”

Links:
Most recent amendment to Form S-1
Stop Order
SEC Press Release