Before the JOBS Act came along, listing a security on a public website would itself have been treated as an act of “solicitation.” That’s the odd thing: Title III portals aren’t allowed to “solicit,” yet in the traditional sense of the term that’s the most important thing Congress created them to do.
The fact is that Congress was ambivalent when it created Title III portals. They are allowed to list offerings of securities, but are not allowed to do other things often associated with the sale of securities, including holding investor funds or offering investment advice. They are regulated by the SEC and FINRA, but with a light touch compared with other regulated entities. They are privately-owned, but are required to provide educational materials to investors, police issuers, provide an online communication platform, and ensure that investors don’t exceed their investment limits – in short, they are required to assume a quasi-governmental role.
Title III portals are a new animal, part fish, part bird. Which makes it that much more difficult to decide what “solicit” means when they do it.
Based on the statute, the SEC regulations, the legislative background of the JOBS Act, and the history and overall context of the U.S. securities laws, I think a Title III portal engages in prohibited “solicitation” anytime it tries to steer an investor to a particular security. If it’s not trying to steer an investor to a particular security, then it’s probably okay.
I’ve included some practical guidelines in the chart below. Although there are plenty of gaps, I hope this helps.
Click the following for a print ready version of the complete chart: Rules for Title III Portals
Title III requires all these disclosures, reported on the new Form C:
- The name, legal status, physical address, and website of the issuer
- The names of the directors and officers of the issuer and their employment history over the last three years
- The name of each person owning 20% or more of the issuer’s stock
- The issuer’s business and business plans
- The number of employees of the issuer
- A statement of risks
- How much money the issuer is trying to raise
- How the money will be used
- The price of the shares or the method for determining the price
- The capital structure of the issuer, including the rights of all security-holders, restrictions on transfer, and how the securities are being valued
- A description of the portal’s financial interests
- A description of the issuer’s liabilities
- A description of other offerings conducted within the past three years
- A description of “insider” transactions
- A discussion of the issuer’s financial condition
- Financial statements or their equivalent
- Any other information necessary in order to make the statements made not misleading
As I write this, a lot of very smart entrepreneurs and software engineers are working to automate these disclosures. They have to: to make money running a Title III portals, you’re going to have to automate everything that can be automated.
Now look at Title II. As a write this, the disclosures for almost all Title II deals are prepared the old-fashioned way, with a lawyer writing an old-fashioned Private Placement Memorandum. The PPM for Deal 1 on Portal X might or might not include the same information as the PPM for Deal 2 on Portal X, and almost certainly doesn’t include the same information or look the same as the PPM for deals on Portal Y. An investor trying to compare apples to apples would go, well, bananas.
That situation is ripe (sorry) for change and I think it will change as Title III comes online, for three reasons:
- As someone argued recently, investors couldn’t care less about the distinction between Title II and Title III. They are going to want to see the same information in the same format.
- Using the tools developed for Title III, Title II portals will be able to provide more information than they are currently providing, cheaper and more effectively.
- There is no law that dictates what information must be provided in a Title II offering. But we still think about 17 CFR §240.10b-5, which makes it unlawful to “. . . .make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made. . . .not misleading. . . .” As the industry develops, it seems at least possible, if not likely, that the disclosures required by Title III could be viewed as the standard for avoiding Rule 10b-5 liability.
Questions? Let me know.