Category: SEC

Crowdfunding and Washington Politics

On By crowdfundattnyIn JOBS Act, SECLeave a comment

As it works on Crowdfunding regulations, the Securities and Exchange Commission is in a tough position, as we described here.

If the SEC’s job were not tough enough already – interpreting a brand-new, complicated concept with very little Congressional direction – it has just become tougher as Red State/Blue State politics has entered the equation.

Previously a group of Senators, all Democrats, sent a letter criticizing the regulations the SEC proposed to implement “Rule 506 Crowdfunding,” where the JOBS Act, for the first time, allows mass solicitation of investors in certain securities offerings.

Now a group of eleven different Senators, all Republicans, have sent their own letter praising those same regulations [Bill, see page 10 for confirmation]. In the view of the Republicans, the regulations proposed by the SEC properly implement the intent of the JOBS Act, contrary to the judgment of their Democratic colleagues.

There are two ironies: one, the two groups of Senators disagreeing about what the JOBS Act means, after both voting for the identical language; and second, the group of Republican Senators praising the work of President Obama’s SEC in the face of Democratic criticism.

For the SEC, however, the back-and-forth means one more headache, trying to produce workable JOBS Act regulations in the partisan atmosphere of Washington, D.C.

Questions? Let me know.

Crowdfunding On Hold

On By crowdfundattnyIn Crowdfunding, JOBS Act, SECLeave a comment

When the JOBS Act was signed into law by President Obama on April 25, 2012, the idea was to have both kinds of Crowdfunding up and running by January 1, 2013:

  • The “real,” broad-based Crowdfunding, which allows companies to raise up to $1 million from large numbers of investors of any income level; and
  • The “Rule 506” Crowdfunding, which allows companies to raise money from accredited investors using general solicitation.

Yet neither kind of Crowdfunding is available now, and neither is likely to be available on January 1st.

The bottleneck is at the Securities Exchange Commission. The JOBS Act established the basic Crowdfunding rules but left it to the SEC to work out the details. So far, the SEC has proposed rules for Rule 506 Crowdfunding but has not yet finalized those rules, and has not yet even proposed rules for the real, broad-based Crowdfunding.

Apart from a lack of manpower, the reason for the delays can be seen from the reaction to the rules the SEC proposed for Rule 506 Crowdfunding. As reported in this blog, the proposed rules did not draw clear lines, instead leaving it to companies and ultimately the courts to establish what was reasonable. The lack of specificity left many people unhappy, including a group of Senators that excoriated the SEC publicly for the lack of guidance and accused the rule-makers of failing to protect the investing public.

Congress passed to the buck to the SEC, but now the SEC isn’t sure what Congress wanted. It’s a very tough bind for the regulators.

And if Rule 506 Crowdfunding presents tough issues for the SEC, they are child’s play compared to the issues that arise from broad-based Crowdfunding, where the investing public, by definition, needs much greater protection than accredited investors.

There is no definite word as to when the SEC will finalize the rules for Rule 506 Crowdfunding or even propose rules for broad-based Crowdfunding. Meanwhile, companies wanting to raise money, portals wanting to help them raise money, and investors wanting to invest are like travelers at the airport seeing “Delayed” on the overhead screen. Nobody can do anything until the SEC acts.

Questions? Let me know.

SEC Proposes Rules for Crowdfunded Rule 506 Offerings

On By crowdfundattnyIn Crowdfunding, JOBS Act, SECLeave a comment

The JOBS Act required the SEC to issue regulations allowing the use of “general solicitation” in Rule 506 offerings, as long as all the purchasers are accredited investors. The SEC has now proposed such regulations, which is welcome, but anyone expecting step-by-step guidance will be disappointed.

The proposed regulations establish three criteria:

  1. The issuer must take reasonable steps to verify that the purchasers are accredited investors.
  2. All purchasers must be accredited investors, either because they meet the objective definitions of “accredited” or because the issuer reasonably believes that they do at the time of the purchase.
  3. All of the other terms and conditions of an offering under Regulation D must be satisfied.

Note the key phrases: the issuer must take reasonable steps to verify that the purchasers are accredited and must reasonably believe that they are accredited.

The definition of “reasonable” is critical here, as it is in many other areas of law – but no real definition exists. Reasonable is whatever a reasonable person thinks is reasonable, yet reasonable people sometimes disagree. For the issuer trying to complying with the law, the important points are (1) you cannot merely pretend to believe your purchasers are accredited, but are required to really look into the question and be able to prove that you did so; and (2) as long as you tried to ensure that your purchasers were accredited, not in a perfunctory way but in a meaningful, reasonable way, you will not be penalized just because you turn out to have been wrong.

Some hoped that the SEC would offer more objective criteria, e.g., if you take steps one through six then you will satisfy the legal requirement. However, the SEC decided that the question could come up in so many different ways, no single approach would be sufficient.

The SEC did note that the steps an issuer might take to determine whether a purchaser is accredited, and the information it might require, would vary depending on such factors as the nature of the purchaser (e.g., individual or established business), the amount and type of information the issuer has about the purchaser, and the nature of the offering. For example, an individual purchaser claiming to be accredited based on his or her income might need only to produce W-2 statements, while the situation would be more complicated for an individual purchaser claiming to be accredited based on net worth.

If adopted in their current form, the SEC regulations would, in effect, require issuers, their lawyers, the SEC, and the courts to work all of these questions out over time. For now, proceed with caution.

“General Solicitation” With Accredited Investors: Another Kind of Crowdfunding

On By crowdfundattnyIn Crowdfunding, Financings, JOBS Act, SEC, Securities Laws, UncategorizedLeave a comment

In President Obama’s JOBS Act, Crowdfunding means a very specific thing:  raising money from lots of investors through a registered broker-dealer or a “portal.” That kind of Crowdfunding won’t come into effect until January 1, 2013 or such later time as the SEC issues regulations. 

But the JOBS Act made another important change to the way companies can raise money from investors, and in the scheme of things this change might turn out to be even more important.

Background:  When a company raises money from investors it becomes subject to the securities laws, administered by the SEC. Big companies like Facebook are required to go through a long and expensive process of registering their stock with the government, but long ago the SEC adopted a much simpler set of rules for smaller companies, often referred to as Regulation D, or Reg D for short. Reg D provides for three main varieties of raising money legally:  a Rule 504 offering, a Rule 505 offering, and a Rule 506 offering.

Of these the Rule 506 offering is the simplest and most streamlined, in part because it allows the company to avoid state “blue sky” laws. Until now, however, Rule 506 has comes with one key limitation:  the company seeking to raise money could not engage in “general solicitation.” That means the company could look for investors through word of mouth, or from friends and family, or by using brokers, but it could not run a television advertisement or ask for money on the internet.

The JOBS Act changes that rule. As long as a company is willing to limit its investor pool to accredited investors – generally meaning institutional investors or investors with high incomes or high net worth – it may conduct a Rule 506 offering using general solicitation, and thereby reach a much larger audience than it could before.

By definition, accredited investors have more money than non-accredited investors. By definition, startup companies (and other companies) are looking for investors with money. It stands to reason that the market for “crowdfunded Rule 506 offerings” could become much larger than the market for Crowdfunding itself. In a true Crowdfunding offering, for example, the company can raise no more than $1 million and will likely end up dealing with many, many investors. In a crowdfunded Rule 506 offering, on the other hand, a company could raise $10 million from one investor that it found through the internet.

The SEC was required to issue regulations about “general solicitation” within 90 days after enactment of the JOBS Act. The regulations have been delayed, but probably not for too much longer. Within the next month or so we expect the ban on general solicitation to be lifted, allowing at least one form of “crowdfunding” to spring to life.