I recently heard a University of Minnesota professor interviewed on Minnesota Public Radio about her crowdfunding campaign. She was looking to raise $6,000 to study a parasitic brain worm affecting Minnesota’s moose population. As a Venn diagram of MPR listeners and moose-lovers is, no doubt, pretty close to two overlapping circles, this interview was surely a great way to attract a crowd of supporters (and funding) to her cause. But did the MPR interview violate restrictions on advertising in securities regulations?
In an unrelated instance (and in a less wholesome media source), Playboy Magazine published an interview of Google’s founders Sergey Brin and Larry Page shortly before Google launched its initial public offering. Apparently, someone at the Securities and Exchange Commission (SEC) read the magazine, and the SEC investigated Google for publicly promoting the offering before it was registered with the SEC. Did this interview violate restrictions on advertising in securities regulations?
The answer to the first question is no: the professor on MPR described a rewards-based crowdfunding campaign—one in which she sought donations for her research while promising nothing in return. Rewards-based crowdfunding campaigns are not subject to securities regulations. Had she gone on air to discuss a securities crowdfunding campaign—say, to sell stock in her start-up moose pharmaceutical company— she may have found herself in hot water with securities regulators. The Playboy interview, on the other hand, may have caused Google to violate federal law. IPOs are securities offerings that generally must be registered with the SEC and/or state regulators. Securities regulations impose certain limitations on how IPOs can be promoted while a securities registration application remains pending. Though the SEC ultimately did not take action against Google, it briefly appeared that Google’s IPO would be delayed while the SEC investigated the incident—an outcome that may have had significant consequences for the then-still-young company.
The above examples are instructive (although somewhat indirectly) for companies wishing to raise money through a Regulation CF or MNvest crowdfunding campaign. Both of these regulations place conditions and limitations on what information can be shared with prospective investors outside of the portal hosting the offering. Namely, both regulations limit the company to advertising only general information about the business and terms of the offering—such as how much money the company intends to raise, in what time period, and according to what terms. Limited advertisements outside of the portal, although permitted, must always direct potential investors to the portal where the company’s disclosure documents are available. MNvest also requires any advertisements of the MNvest offering to include specific disclaimers about how the offering is regulated.
So, what does this all mean?
If you are a business owner relying on MNvest or Regulation CF to raise money, think twice before you conduct a TV, radio, or print media interview to discuss your crowdfunding campaign. Be sure you understand whether any advertising limitations apply. Even inadvertently violating the advertising restrictions in MNvest or Regulation CF may cause you to lose your exemption from federal and/or state securities registration requirements, which may in turn subject you to unwanted scrutiny (and potential fines) by securities regulators. What could be worse than that? A parasitic brain worm, perhaps.
Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having spent several years working for federal and state regulators in Washington D.C. and Saint Paul, MN before entering private practice. Brian assists clients in all aspects of working with securities regulators, whether it be to obtain a license or registration, prepare for an audit, or respond to an enforcement investigation. Brian also regularly advises clients on their general business needs, particularly surrounding raising money through securities offerings.