Inside The Kore #72
The 72nd issue of Inside The Kore is out!
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Key Insights into Reg CF Resale Restrictions
Understanding the nuances of financial regulations is crucial for anyone involved in the private capital markets. While the rules may seem straightforward at first glance, their true implications often require a deeper dive. This special article, written by Jamie Ostrow and Andrew Stephenson will explore a specific aspect of Regulation Crowdfunding, focusing on Reg CF resale restrictions, which are often more complex than they initially appear.
Keep reading and learn more.
General rule: if you read the SEC rules with blinders on, you are probably well on your way to getting yourself in trouble.
Rule 501 of Regulation Crowdfunding states that shares issued in a Regulation Crowdfunding offering “may not be transferred by any purchaser of such securities during the one-year period beginning when the securities were issued,” unless the securities are transferred:
A recent blog post caught my attention where the author discussed having to enter into a binding agreement with a buyer. According to this agreement, the buyer would not pay for the shares now, and the shares would not be transferred on the company’s books until one year after the purchase. However, after that period, the buyer was obligated to pay for, and the seller was obligated to transfer their shares. The blogger believed this complied with the rule, as the shares had “yet to be transferred.”
Unfortunately for that blogger, understanding the rules requires a broader perspective. This is a resale restriction and should be understood to encompass more than just the physical transfer of shares or the notation of share ownership in the company’s books, or even the movement of funds. In this context, “transferred” should be read as “sold, transferred, or assigned.” In this case, the shares were assigned upon entering the binding agreement as the seller has encumbered the shares by granting rights to the buyer.
We see a fair amount of attempts to get around the requirements of the rules with arguments that the way something was papered complies. However, that is not going to work if someone starts pulling the thread, as the underlying economic reality of the transaction or offering structure is going to come through and be outside of the requirements under the rules.
In the complex world of securities regulation, particularly under Regulation Crowdfunding, it’s easy to fall into the trap of overly narrow interpretations. However, understanding the broader implications of these rules is essential to maintaining compliance and avoiding potential legal issues. Remember, the rules are designed not just to be followed, but to be understood in their full context.?
Source: Crowdcheck.
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