SEC Issues Investor Bulletin on “SAFE” Crowdfunding Security Offering
On May 9, the SEC’s Office of Investor Education and Advocacy released an Investor Bulletin addressing crowdfunding risks associated with Simple Agreements for Future Equity (SAFE) securities. Regulation Crowdfunding, adopted by the SEC in November 2015 and effective as of May 16, 2016, “permits individuals to invest in securities-based crowdfunding transactions subject to certain thresholds, limits the amount of money an issuer can raise under the crowdfunding exemption, requires issuers to disclose certain information about their offers, and creates a regulatory framework for the intermediaries that facilitate the crowdfunding transactions,” among other things. According to an updated investor bulletin from the SEC, the rule allows individual investors to participate in securities-based crowdfunding offerings through funding portals that are registered with the SEC and members of FINRA. To assist issuers, the SEC published Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, which outlines investor limits, restrictions, and exemptions.
SAFE securities. Unlike common stock, SAFE purchasers do not receive a current equity stake in a company. Rather, a SAFE offering is an agreement to provide a future equity stake based on the investment amount only if a particular triggering event occurs. Because of this, the SEC cautioned that investors should pay particular attention to the terms of a given SAFE offering, since there is no guarantee that the necessary triggering event will occur. Furthermore, the SEC warned investors to review other SAFE provisions such as conversion terms, repurchase rights, dissolution rights, and voting rights. The SEC noted that SAFEs were developed to give “sophisticated venture capital investors” the opportunity to invest in “hot” startups in need of capital while avoiding some of the more labored negotiations associated with equity offerings. Moreover, since SAFEs are not standardized, the SEC stressed the importance of investors having a detailed understanding of the terms of these types of offerings.