The term “offer” is broadly defined under the securities laws as "every attempt or offer to dispose of, or solicitation of an offer to buy . . . for value." An offer, even without completion of the sale of securities, can run afoul of the securities laws.
An interesting case from 2011 punctuates this point and demonstrates the risks of unknowingly violating securities laws. Two advertising executives hatched an innovative, although imprudent, plan to purchase Pabst Brewing Company by offering to sell shares on Facebook and Twitter to cover the $300 million cost of the transaction. The campaign, which may have begun as simply a publicity stunt, was wildly successful, attracting five million pledging $200 million. A bit too successful, it turns out.
The SEC soon took notice and halted the campaign via a Cease and Desist Order due to a violation of securities laws by the ad men. They failed to register the public offering with the Securities and Exchange Commission (SEC) and could not meet an exemption. A settlement was reached and the men, who never actually collected any money, paid a fine and agreed to stop selling shares to the public.
The SEC, which has an entire enforcement unit devoted to Internet surveillance, is paying increasing attention to online activity. By law, public offerings - online or otherwise - must be registered with the SEC or meet an applicable exemption before promoters begin to offer or sell shares.
Since the Pabst case in 2011, the law with respect to "crowdfunding" - the practice of funding a project or venture by raising money from a large number of people via the Internet - has evolved. The Jumpstart Our Business Startups (JOBS) Act was signed into law in April 2012, and one of its objectives was to create rules for small businesses to raise funds from non-accredited investors. Title III of the Act exempts certain crowdfunding from registration requirements of the federal securities laws. While the SEC issued proposed regulations in October 2013 to implement the exemption, final regulations have not yet been issued, and the exemption will not be effective until the SEC does so.
A May 1, 2014 Wall Street Journal article, entitled “Frustration Rises Over Crowdfunding Rules,” details efforts in the U.S. Congress to amend the JOBS Act even before the final regulations have become effective. These frustrations have led certain states, including Michigan, to try to sidestep the JOBS Act and SEC, and create their own exemptions in state law.
As we previously reported on this blog, on Dec. 30, 2013, Gov. Snyder signed Public Act 264 of 2013 into law (the "Act"). The Act amends the Michigan Uniform Securities Act to provide an exemption from securities registration for intrastate crowdfunding.
So what should businesses in Michigan take away from all this? Federal and state securities laws are a complicated thicket of rules and regulations. Before soliciting investments from outside investors, it's important to plan carefully with legal counsel to make sure you do not violate securities laws. The SEC and state enforcement agencies are paying attention and the penalties are steep.