The SEC (Finally) Issues a Preliminary Rule for Repeal of the Regulation D General Solicitation Requirements

Yesterday, the SEC finally released its proposed rule to amend Rule 506 of Regulation D to eliminate the general solicitation prohibition for private placement offerings. As I’ve discussed in a previous post, the SEC’s continued delays in issuing this rule has resulted in considerable frustration among the entrepreneurial community and in Congress.

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SEC Continues to Miss Key Deadline in Implementing JOBS Act, Drawing Ire of Congress

The JOBS Act contained two provisions that have the potential to help startups in their capital-raising efforts: (1) reform of Regulation D, which will permit more widespread solicitation of angel investors (this is also frequently referred to as the repeal of the general solicitation prohibition) and (2) the crowdfunding provision, which will permit startups to raise money from ordinary investors over the Internet. Both of these provisions require the SEC to issue implementing regulations before they can take effect. The regulations for crowdfunding are not due until the end of the year, but the regulations to reform Reg. D were due back in early July. As of the date of this post (August 24, 2012), the SEC has yet to act.

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SEC Misses Deadline to Issue Regulations Eliminating the General Solicitation Prohibition in Regulation D Private Placements

For startups looking to raise capital, Rule 506 of Regulation D is probably the most commonly used exemption from securities registration requirements. It allows a company to make offers and sales to an unlimited number of accredited investors[1] in order to raise an unlimited amount of money. One of the key conditions placed on a Rule 506 offering is that no general solicitation or general advertising can be used by the issuer or any person acting on its behalf in connection with the securities offering. This means that a startup looking to raise capital currently cannot advertise its offering publicly and generally must limit its investors to the personal connections of the company’s principals. The SEC has stated in its various rulings that the key consideration is whether there is a “substantive pre-existing relationship” between the issuer or its agent and the offerees. Of course the vagueness of this standard provides a great amount of legal uncertainty for startups looking to raise capital, as there are any number of situations that could arise that fall within a grey area.

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In spite of what you may have heard, the Senate just effectively killed crowdfunding.

This last week, the Senate passed the “JOBS Act,” leaving it one step away from final passage by Congress and Signature by President Obama.  The JOBS Act contains a number of provisions which are aimed at reducing the securities compliance burdens of small companies and startups.  One of the major provisions within the JOBS Act is the so-called “crowdfunding” provision.

Crowdfunding has an enthusiastic following online and within the entrepreneurial community.  Obviously, that following is very excited about the bill’s Senate passage.  Unfortunately, I don’t think they should be popping the champagne corks anytime soon.  Before passing the bill, the Senate passed an amendment to the bill substituting a new version of the crowdfunding law by Senators Merkley, Bennet, and Brown in place of the one written by Rep. Patrick McHenry.  All signs point to the Republican leadership in the House conceding to the Senate’s amendment this week in order to get the bill to the president’s desk for signature as soon as possible. [Read more…]

Working Effectively with Your Lawyer: Don’t “Recycle” Legal Work

Recycling is generally considered a good thing when it comes to trash.  It helps the environment and conserves resources.  However, in the context of legal work, it is not such a good thing.  Of course, when I use the word “recycle,” I don’t mean recycling the paper that the legal documents are on.  I’m talking about recycling the actual words on the page.  When a client “recycles” their lawyer’s work which was performed on a previous deal and uses it in a new deal, the client is asking for trouble. [Read more…]