April 24, 2012
Dear SEC Staff:
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 size of the Reg D offering is greater than the size of the crowdfunding offering.
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 here are minimized because professional investors have conducted diligence and negotiated the terms of the deal, 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 the 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/.