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The Right Way to Advertise Your Securities? Don't!

By Cliff Ennico 

It pays to read your junk mail sometimes.

Last week I received a postcard from a Broadway production company looking to raise money for a revival of a classic Broadway musical.

The postcard proclaims "you too can be a Broadway producer" for as little as $1,000, and goes on to explain that the producer is seeking up to $5 million from the public to finance the revival, listing both a Website and a telephone number where people can get more details and pick up a copy of the producer's Offering Circular.

The postcard goes on to list the states in which the offering is being made, and concludes with the following fine print: "No sale of any Units shall be made in any state unless the offering has been registered or is exempt in such state, an Offering Circular has been delivered to the investor before the sale, and the investor meets any applicable qualifications."

Nice try, guys, but no cigar. This offering is illegal.

The Broadway production company that sent me this postcard has fallen victim to one of the biggest misconceptions about securities law: namely, that "I can pitch my offering anywhere and to anyone I like, and I'm okay as long as I only accept investments from people who are qualified to buy my securities so that I fall within the definition of a 'private offering'."

Frankly, that's the way the law should be. But it ain't where the law is today.

When we speak of a "private" or "nonpublic" offering, we are talking about an offering of securities that doesn't have to be registered either with the U.S. Securities and Exchange Commission or with a state securities regulator. Generally, to qualify as "private," an offering must meet two conditions.

First, it cannot be made "to the public" (i.e. every Tom, Dick and Jane) but only to certain "private" individuals - people who, by their extensive knowledge, wealth or sophistication in financial matters do not need the protection of the securities laws. By this standard, the Broadway producer's postcard is probably okay because it clearly states that only certain people will be allowed to buy in to the production (these people are not specified, but I'm assuming the producer or its attorneys will screen people to make sure they meet the SEC and state law criteria).

But then there's the second condition: that the offering cannot be made "publicly" - in a way or manner that is likely to attract unsophisticated people to an offering of securities they can't handle.

The federal securities regulations make it clear that any offering that is made via a "general solicitation or general advertisement" cannot qualify as a private offering, even if the only people who respond are the "right sort" of people (what the SEC calls "accredited investors"). The producer's postcard was clearly sent to thousands of people in the greater New York City area, whose names appeared on a mailing list the producer bought somewhere. If that isn't a "general solicitation", I don't know what is.

Now, it may be possible that the producer has registered its offering with the SEC and with the state securities regulators in each state listed on the postcard where investors are being solicited. If they have taken the time to do that, and paid the cost of doing so, then the postcard offering is perfectly legal. A public offering of securities, as opposed to a private offering, may be promoted just about any way the issuer of the securities wishes.

If the producer hasn't registered with the SEC and each state in which their "offerees" (recipients of the postcard) live, however, they have committed a major boo-boo under the securities laws and will be required, at the very least, to withdraw the offering and refund any money investors may have paid them.

Because this is a Broadway production, the producer will also need to take into account New York's Theatrical Syndication Financing Act, Article 3 of the N.Y. Arts and Cultural Affairs Law (a copy of which can be found at This statute requires that very specific disclosures be made to people who want to become Broadway "angels" - disclosures that are specific to theatrical productions and go way beyond the disclosure requirements of federal and state securities laws.

Could the producer have done this the right way by merely listing the offering on its Website, for example by a link saying "to become an investor in this show, click here"? After all, something that merely appears on a Website is not being "directed" at anyone in particular.

It's a tough call, but I think the SEC's prohibition on "general advertising" is broad enough to include such a listing. Since anyone can look at the Website, anyone can link on the link and become an "offeree" even if they don't ultimately buy the securities.

The bottom line is that whenever you pitch investments in your company to people you don't know personally (and well), the securities laws come into play. Get the right legal advice before you mail that postcard.

Cliff Ennico ( is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at COPYRIGHT 2011 CLIFFORD R. ENNICO.  DISTRIBUTED BY CREATORS.COM.  Permission granted by

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