This week, the Crowdfund Intermediary Regulatory Advocates (CFIRA), of which Funding Launchpad is a founding member, submitted recommendations to the Securities and Exchange Commission on general solicitation under the JOBS Act, including recommendations on safe harbors for investment adviser issues, fraud, crowd commentary, peer-to-peer lending, and matching.
To back up a step, a “safe harbor” is generally a rule established by the SEC which provides, well, a safe harbor for persons seeking to comply with the securities law. They generally take the form of “so long as companies only do A, B and C, and provided that they avoid doing X, Y, and Z, then they will not be deemed to be in violation of such-and-such securities law.” It doesn’t mean that X, Y or Z necessarily “do” violate the law – those activities remain ambiguous and subject to case-by-case analysis. Thus, safe harbors don’t eliminate ambiguity or envelope-pushing. But, when reasonable safe harbors are provided, issuers tend to use them rather than pushing the envelope and risking trouble. This reduces uncertainty for market participants, and means the SEC spends less of their time scrutinizing transactions.
We and the other members of CFIRA believe that robust safe harbors are essential for clarifying what crowdfunding intermediaries can and cannot do without violating broker-dealer laws, investment adviser laws, and other such legal landmines. The letter we sent to the SEC this week seeks clarification regarding such basic, fundamental questions as what parameters platforms may adopt to screen issuers and what user-generated information can be publicly displayed on the platform. It shows how legally complicated and unclear the entire landscape is, and why CFIRA has the potential to play such an important role in the shaping of the rules surrounding the JOBS Act.
Interesting solutions to the investment adviser problem in the securities regulation.
And I am especially interested in the Matching section “Conclusion: A portal that provides information management tools, such assearch functions and automatic notification mechanism, should not be deemed to be acting as an investment adviser.” It appears that sites who match may not be able to conduct any other crowd related services?
What about sites that wish to conduct due diligence through online interviews with people raising capital? As we know, many of the pitch videos are becoming more and more produced. I foresee pitch videos becoming much like advertisements than a way to vet fundraisers. I think it is a great opportunity to use advances in online video conferencing technology to conduct un-produced interviews with the individuals raising money to give the public an accurate picture and allow potential investors to ask specific questions.
Any light you can shed on this would be greatly appreciated
Eamon
http://www.crowdvetfund.com
Thank you crowdvetfund. We very much wish we could “shed some light”, but alas, we won’t really know until the SEC releases their rules. The SEC is very cordial and appreciative of the comments CFIRA gives them, but they remain tight-lipped, and so it’s anybody’s guess as to exactly what portals will ultimately be permitted to do.
The underlying principle to our comments, to my mind, is this: There needs to be a very clear demarcation between what the intermediary’s admins/owners can say regarding the merits of an offering (pretty much nothing), and what users/investors/the crowd can say (virtually unlimited, with terms of use forbidding abuse, etc). The intermediaries are passive vehicles, repositories for issuer-specific information and analysis, NOT providers of such information and analysis. But, the other side of that coin is that intermediaries need to be permitted to passively display comments/information/analysis from the crowd (whether subjective, objective, positive, negative), without such intermediary being deemed an investment adviser by virtue of passively displaying such information.
I believe that your points regarding videos and video conferencing fit well into this view. Video conferencing could indeed be a very fitting way of conducting crowd diligence on an issuer — although we believe such videoconferences would probably have to be recorded and uploaded to the offering page for the duration of the offering, so that all prospective investors are given access to the same information. As to high-production promotional videos, I agree with you that this is in many ways the next generation of advertising. Title III of the JOBS Act permits general solicitation (i.e. advertising) of offerings – promotional videos should be construed as advertisements, just like any other. They are subject to the same anti-fraud rules as print ads or anything else. But importantly, we believe that just because a portal could never publish its own promotional video, promoting an individual offering on its site (as this would be investment adviser/broker-dealer behavior), that does not mean portals should be prohibited from allowing issuers to post their own promotional videos (indeed, we think videos will be key components of successful crowdfunding offerings).
Lets hope the SEC agrees with us!