CFIRA

Let’s (Not) Make That Video

By Thaya Brook Knight

Hello, entrepreneurs! Are you busily working on that killer video you’re going to use to raise funds once crowdfunding is legal? Have you recruited top film talent to really sell your company and your terrific business plan? Will it be a tribute to your company’s stellar qualities?

Photo by Tom Pagenet

I hope not. I really hope not. Yes, it’s the CrowdCheck Queen of the Wet Blankets, the General Counsel, once again. Here’s the thing – we’re not in Oz this time. We’re in Kansas. What do I mean? You’ve seen those Kickstarter and Indiegogo videos, right? They do a great job of showing the project in the best light. You feel downright…inspired after watching them. They’re bright and shiny and a lot like Oz. What don’t you see? All the problems. All the reasons the project might not work. All the permits or facilities or licenses the project creator hasn’t managed to get yet. All the reasons the creator might not actually be the right person to do this job. “Darn, right!” You say. “Why on earth would anyone put all that in if they’re trying to get funding?” Because this is Kansas. And in Kansas, that video is a securities offering document, not a product advertisement.

Let me tell you about Kansas, aka the world of securities offerings (which is what you’re planning to do, right? Offer stock or bonds?). In Kansas, we show our companies in all their glory and their ugliness. You have two factories? Great. Tell the public that. One of them is on fire and will be a pile of ashes in an hour? Great. You’re going to tell the public that, too. You have to tell the public not only the truth, but the whole truth.

Thaya Brook Knight

There’s this concept in securities law called “the monopoly of the prospectus.” In traditional offerings, there’s a prospectus that provides the public with all the information about the offering. Anything untrue or misleading in the prospectus can subject the company to liability and SEC action. Any statement about the offering is treated as part of the prospectus even if it doesn’t actually appear in the prospectus. So say there’s a company with an IPO and the company CEO goes on TV and says “our sales are through the roof!” Part of the prospectus? Yep. Can the company get sued or have SEC problems based on this statement? Yep. What if it’s true? Well, it may be true but it’s not the whole truth. What does “through the roof” mean? Does it just mean sales for the last quarter? What about the next quarter? Can investors expect sales to continue at this pace? Why or why not? So you can see how “sales are through the roof” might be the truth, but it isn’t the whole truth.

We know that there aren’t going to be traditional prospectuses in crowdfunding. We don’t exactly know what is going to be required yet in terms of disclosure, but one thing I can predict is that the requirement to tell the whole truth is going to apply to crowdfunding just as it does to traditional offerings.

Now about that video of yours. You probably can still make it (nothing in the JOBS Act says “no videos” but we’re still waiting on the SEC to issue final rules – who knows whether they’ll mention videos) but it’s going to look a lot different from those Kickstarter videos. It’s going to be the whole truth. (Right?) Pretty and ugly and everything in between. Kansas instead of Oz.

Queen of the Wet Blankets, signing off.

Thaya Brook Knight, co-founder and General Counsel of CrowdCheck, has broad experience in securities litigation, financial policy, and oversight. Before joining CrowdCheck, she served as Investigative Counsel for the Congressional Oversight Panel, a watchdog for the Troubled Asset Relief Program (TARP).  Reprinted with Permission. Feature photograph by Tom Pagenet under Creative Commons Attribution-Share Alike License

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