By: David Drake

Close to 200 people participated in the SEC public hearing on Small Business Capital Formation last Thursday. The morning workshop covered the JOBS Act implementation (which includes crowd funding) while the afternoon panel dealt with capital formation issues not covered by the JOBS Act.  

Crowd funding had, by far, the largest turnout. It was the biggest issue and it and the least noticed Regulation D 506 c were fervently covered.  To a lesser extent, so were Regulation A+ and the Onramp IPO. The 500 rule and 2000 rule for community banks were also covered, which pleased me as too few are knowledgeable on how it affects the markets.  

The main issues were discussions on what was the need for non-exclusive safe harbors on accreditation verification of investors under SEC exemption Regulation D, 506 c.  Regulation 506 2011 represented $900+ billion in transactions in 2011 while public offerings were doing $950+ billion in the same year.  Reg D 506 is SEC’s largest exemption for non-public offerings and is used by funds equally as often as it is for firms.  The mind boggling changes are now available for comment on the proposal the SEC Commissioners approved 5 to 4 last August 29.  The new version Reg 506 will be called 506 c and the old will remain as 506 b.  The biggest change with 506 c is that it removes the general solicitation ban that now exists.  Please note, there is no limit to how much money you raise under Regulation D 506.  The limit had always been that you had to be rich to qualify to invest (except 35 non-accredited investors).  506 c allows only accredited (rich) investors to invest, but now you can solicit investors via TV, internet, conference, print, radio.

In essence, the US will become the largest market in the world peddling non-public or private offerings and we are facing unprecedented legal change around these changes.  We may be the only country in the world allowed to solicit to the general public for private offerings much like what was done prior to the 1929 crash; but this time with safe harbors, regulation and policing by SEC and FINRA.  

Do reach out to us should you have opinions about how you see this playing out in 2013.