In his article, author Merritt B. Fox considers the appropriate disclosure requirements in the context of public offerings, such as offerings made in reliance on Rule 506(c), Regulation A, and Regulation CF, undertaken by privately held companies as to which there is little or no previously available information, resulting in information asymmetries. He begins his analysis by going back to first principles. Information asymmetries may motivate potential investors to exact a significant discount from the issuer in connection with a financing. The asymmetries can be addressed in a variety of ways, including reliance on intermediation by a gatekeeper like an underwriter. Another, of course, is requiring disclosures to be made in connection with the proposed offering and/or following the completion of the offering. Imposing issuer liability and underwriter liability would accompany the mandatory disclosure framework in order to compel issuers and gatekeepers to undertake their disclosure obligations seriously. Having established these principles, Fox considers the current framework for each of the three offering exemptions. In a Rule 506(c) offering, there is no required disclosure, and no ongoing disclosure obligation following completion of the offering. An issuer is subject only to liability under Rule 10b-5 for material misstatements made in connection with the offering. There is no underwriter taking principal risk that would function in the role of a gatekeeper. There is no identified approach to addressing information asymmetries in Rule 506(c) offerings. In Regulation A offerings, there is a mandatory disclosure requirement at the time of the offering and a periodic disclosure requirement following completion of the offering. The issuer is subject to liability subject to a due diligence defense. An underwriter participating in a Regulation A offering also is subject to liability. Regulation CF also requires that certain information be disclosed at the time of the offering, and in certain instances requires ongoing disclosures post offering. The issuer also faces strict liability subject to a due diligence defense. There is no “firm commitment” underwriter in a crowdfunded offering. The article asks whether the reduced disclosure requirements are sensible when one considers the burdens that may be placed on smaller issuers, on the one hand, and the information asymmetries and possibility of adverse selection that are associated with the offering of new securities into the market.
