Improving Legal Documents in Crowdfunding: Get Rid of the State Legends!

On August 9, 2016 By crowdfundattnyIn Compliance, Crowdfunding, Crowdfunding Laws, JOBS ActLeave a comment

I see lots of offering documents like this, with pages of state “legends.” The good news is that in Crowdfunding offerings – Title II (Rule 506(c)), Title III (Regulation Crowdfunding), and Title IV (Regulation A) – you can and should get rid of them.

The legal case is pretty simple:

Before 1996, states were allowed to regulate private offerings. Every state allowed exemptions, but these exemptions often required legends, differing from state to state.
The National Securities Market Improvement Act of 1996 added section 18 to the Securities Act of 1933. Section 18 provides that no state shall “impose any conditions upon the use of. . . .any offering document that is prepared by or on behalf of the issuer. . . .” in connection with the sale of “covered securities.”
The securities sold under Title II, Title III, and Title IV are all “covered securities.”
Hence, section 18 prohibits states from imposing any conditions regarding the issuer’s offering documents, including a condition that requires the use of a state legend.

If the capitalized legends just take up space, why not include them anyway just to be safe? Take Pennsylvania’s legend as an example:

These securities have not been registered under the Pennsylvania Securities Act of 1972 in reliance upon an exemption therefrom. any sale made pursuant to such exemption is voidable by a Pennsylvania purchaser within two business days from the date of receipt by the issuer of his or her written binding contract of purchase or, in the case of a transaction in which there is not a written binding contract of purchase, within two business days after he or she makes the initial payment for the shares being offered.

If you include the Pennsylvania legend “just to be safe,” you’ve given Pennsylvania investors a right of rescission they wouldn’t have had otherwise!

Two qualifications.

First, the North American Securities Administrators Association –the trade group of state securities regulators – suggests including uniform legend on offering documents. I include this or something similar as a matter of course:

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

Second, some states, including Florida, require a legend to appear on the face of the offering document to avoid broker-dealer registration. Because Section 18 of the Securities Act doesn’t prohibit states from regulating broker-dealers, some lawyers recommend including those legends, while others believe those requirements are an improper “back door” way for states to avoid the Federal rule. I come out in the latter camp, but opinions differ.

Questions? Let me know.

Another Law Affecting Crowdfunding Portals: The Americans With Disabilities Act

On May 20, 2016May 20, 2016 By crowdfundattnyIn Compliance, CrowdfundingLeave a comment

By Adam E. Gersh, Guest Contributor

You probably already know that the Americans with Disabilities Act applies to “places of public accommodation,” like hotels and restaurants. What you might not know is that the ADA probably applies to your Crowdfunding website, or will soon.

Courts have held the ADA applies to websites that supply products or services, reasoning that websites, like buildings, can be “places of public accommodation.” For example, Netflix.com and Peapod reportedly settled cases with the Department of Justice, while Home Depot and Target have faced claims relating to website accessibility. On the other hand, websites that are merely informational, like Mark’s blog, are less likely to be required to comply with accessibility standards.

If you’re operating a Crowdfunding portal then everything you do is online, making you a lot more like Netflix than like a blog. That’s particularly true of Title III Funding Portals, where everything has to happen online by law, but it’s probably true for Title II and Title IV portals as well. Therefore, while there have been no rulings or cases, and the law around the ADA and websites remains unsettled, we can feel pretty confident that the ADA or its state-law equivalents will apply.

How can you get on the right side of the law? The industry has developed a set of standards known as WCAG 2.0 – Web Content Accessibility Guidelines, which include a set of recommendations to make website coding changes with accessibility in mind. WCAG2.0 is an industry standard for non-governmental entities and, most importantly, it is the standard the Department of Justice has used as a measuring stick in the cases brought to date. WCAG2.0 actually has three tiers of accessibility standards but, until the Department of Justice issues new rules or the courts produce clearer rulings, it’s not clear which tier will apply to Crowdfunding portals.

Stay tuned.