Oftentimes, I am asked by clients seeking to raise capital what type of information they can include on their website to inform readers about the investment opportunity. Unfortunately, my answer is that no information may be included unless it is password protected and made available only to individuals that have been pre-screened as eligible “accredited investors.” The Securities and Exchange Commission (“SEC”) has provided specific guidance on this subject and the manner of using password protect information which can be found on its website.

Clients often respond by stating that they are not soliciting investors but are simply letting people know about the project. When pushed further, however, the client reveals that by telling people about the project on its website (or by bringing other attention to the project through broadcast, local newspapers and magazines or other forms of media this will draw inquiries from potential investors interested in participating in the project. Such activity, however, is considered a general solicitation and not permitted if an issue of securities intends to rely on the private offering exemption under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) or the safe harbor thereunder provided by Rule 506 of Regulation D.

After digesting the above, the client then informs me not to worry because it is relying on the offering exemption provided by Regulation S under the Securities Act and not Section 4(2) or Regulation D. Unfortunately, many investors are not eligible investors under Regulation S and, therefore, the client is precluded from accepting investment dollars from a willing investor because Section 4(2) and Regulation D are no longer available because of the project information posted on the website. For example, to qualify under Regulation S, the offer and sale of the security may not occur within the United States. Accordingly, if an offer to sell limited partnership interests or limited liability company interests is made to an individual while he or she resides in the United States or is simply here on vacation, that offer (and subsequent sale) does not qualify for the Regulation S exemption, even if that person returns from vacation to his or her country of residence and thereafter signs a subscription agreement and makes the investment. 

An issuer of securities attempting to invoke exemption from registration, such as that provided by Regulation S, has the burden of proving its applicability. The failure to satisfy even one element could destroy the availability of an exemption for the entire offering and could require the issuer to make an offer of rescission of the sales at the election of the investors (i.e., the sponsor of the securities offering and its control persons would essentially be guarantying personally the investor’s investment). The offer of rescission would have to be made to all investors, even one unaffected by the rule violation. Also, the federal and state regulatory agencies have enforcement rights and, in extreme and aggravated circumstances, may fine and enforce criminal penalties. Providing a disclaimer on your website that the information provided is not to be construed as an offer to sell securities is simply evidence that you are aware of the problem and, therefore, have the scienter necessary to establish liability under certain securities laws.

Understanding the framework and manner in which you or your Regional Center may offer or market securities through a website is the difference between having a lawful offering or subjecting yourself to substantial liability for securities law violations. Experienced securities counsel should be engaged not only to guide you through this process, but also to provide guidance regarding preparation of appropriate disclosure documents (e.g., private placement memoranda), the manner of offering and selling securities (including avoidance of unlicensed finders), and compliance with the Investment Company Act of 1940, if applicable, among other securities laws.