The SEC’s proposed crowdfunding rules include many sensible provisions but some that are completely contrary to the essence of crowdfunding. On page 107 of their 585 rule document, they list out a provision titled “Prohibition on Advertising Terms of the Offering”. In this section they outline what you can and cannot do.
You Can’t Advertise Your Offering
The SEC has proposed that you would not be able to advertise the offering details. For example, a video game company launching a new game would not be able to advertise that they are raising $300,000 in exchange for 40% ownership in the game or company. Issuers would be specifically banned discussing the details of the offering on any forum outside of the crowdfunding portal.
The SEC’s proposed rules state that an Issuer can:
- Give a statement that they are conducting an offering with the name of the Intermediary (crowdfunding site)
- Give a link to the crowdfunding platform
This is contrary to the true nature of crowdfunding. The phenomenon works because momentum is built around a company, product, innovation, or art. People talk about it and share information with each other which in turn makes the offering more successful. Crowdfunding relies heavily on interactions between the issuer and the crowd. Not being able to advertise will make it more difficult for Issuers to reach their fundraising goal.
What is Allowed?
If passed, these crowdfunding rules state that Issuers can advertise that they have launched a crowdfunding campaign on a specific funding portal and direct people to the site for more information. Any online promotion has to be done on the funding portal’s site. Each site functions differently and there is no guarantee how much exposure you will get from the portal itself.
One of the challenges the SEC will have with this provision is enforcement. I don’t think they have spoken with enough experts about how online advertising and social media actually works. For example, if a company has launched a crowdfunding campaign on portal XYZ the page will be live online. When the company goes to direct people to the page they will most likely cut and paste the URL into Facebook along with a short description. Facebook will automatically populate an image from the URL that is likely to contain some details of the offering. The same holds true for other social media platforms. The question then becomes, will the SEC penalize the company by posting offering details onto social media?
People that invest in the company are also likely to share their excitement with friends. One ways companies normally promote this is through social sharing buttons. It is a best practice to give people the opportunity to “Like” the webpage, promote it on Google+, or tweet it. Will the SEC consider this to be advertising since the company is promoting the sharing by giving viewers the tools to spread the word?
Crowdfunding is a Modern Phenomenom
The SEC is approaching crowdfunding like a traditional investment mechanism. The reality is that crowdfunding is the new, modern way to raise capital and invest. They need to remember that social media has changed the way we communicate and it is critical for crowdfunding to succeed. Putting limits on the ability for an Issuer to advertise and communicate with the crowd will hurt the process and a company’s ability to meet their goals.
The SEC is still accepting comments on the proposed crowdfunding rules.