Analysis and Commentary by David Drake
Washington, D.C. — In spite of prior delays, the Securities and Exchange Commission in a 4 to 1 vote finally issued its first proposals for rules under the JOBS Act on August 29, 2012 that would relax general solicitation for accredited investors. The rules were due July 4, 2012, and a previous public meeting on the rules was delayed from August 22, 2012 to August 29, 2012. The public can submit comments on the rules within the next 30 days.
Signed into law on April 5, 2012, the Jumpstart Our Business Start-ups Act — with impressive bipartisan support — makes some revolutionary changes to federal security laws that are over 70 years old. The changes include allowing issuers to advertise certain securities to accredited investors and entrepreneurs to seek up to $ 1 million per year from small investors through crowdfunding portals.
On August 29, four commissioners approved proposed rules in which stock offerings may be marketed to the general public through any advertising mechanism without restriction. However, the rule limits purchasers of those stocks to individuals with more than $1 million in assets, excluding their primary residence, or those earning more than $200,000 a year and requires the issuer of the stock to take reasonable steps to verify whether someone is accredited. Previously, issuers could advertise their Regulation D, Section 506 offerings to the general public.
The commissioners approved the proposal by a four to one vote, recognizing that Regulation D, Section 506 offers and similar exemptions raised nearly $ 1 trillion in new capital in 2011. However, there is more to the story behind the commission’s vote on August 29. For example, four of five commissioners voiced dissatisfaction on several topics.
Commissioner Walter had the least comments. She wanted the Form D form updated, hinting that the form should be submitted to the SEC before a Reg D, 506 offering is made as a measure to prevent fraud. The National Association of Securities Administrators Association made this suggestion to the SEC two months ago. Currently a solicitation of Regulation D, exemption 506 requires issuers to file a Form D within 15 days of actually receiving money.
Commissioner Paredes voted for the proposal but was verbally punishing the SEC for not having issued an interim final rule within the 90 day period (due July 4, 2012) that was required under the JOBS Act. Commissioner Aguilar was strongly against the proposal and voted against it. Commissioner Gallagher approved the proposal but questioned why the Commission was voting only on a proposal and not voting on actual rules as required by the JOBS Act. Clearly, this delays the implementation of this rule by another 6 months.
SEC Commissioner Mary Schapiro reminded the Commissioners that they had not complained when SEC was unable to meet the Dodd-Frank legislation deadlines ordered by Congress. The story is not over. In a terse letter sent August 17, 2012, Rep. Patrick McHenry (R-NC) requested Commission Chair Schapiro to appear before a House subcommittee hearing on September 13, 2012, expressing dissatisfaction over the SEC’s progress in implementing regulations under the new federal JOBS Act. ”The hearing will examine the Commission’s implementation of the JOBS Act, including your failure to implement Section 201 of the JOBS Act by the Act’s statutory deadline and by the deadline you committed in previous testimony,” the Congressman wrote.
Mr. Drake is founder of LDJ Capital and The Soho Loft and co-founder of the Crowdfund Intermediary Regulatory Advocates. The Soho Loft Capital Creation Events “TSL”, subsidiary of LDJ Capital, is a world leader in conference speaking and paneling on crowd funding and the JOBS Act. TSL provides education and leadership to start-ups, and Small and Medium-sized Enterprises in the areas of capital formation, crowd funding, angel networking, non-conventional funding, eb5 green card programs, micro-finance, venture capital, private equity and hedge funds.