In October, the SEC finally completed its implementing regulations to Title III of the JOBS Act, more commonly known as the “crowdfunding” exemption. The 600-page release can be found here. I’m not going to bother summarizing these regulations, as so many others have done a very good job doing of that already. So, as I previously did with the proposed regulations, I’ll instead offer some of my thoughts on and reactions to the final rules: [Read more…]
Back in March, I wrote about proposed revisions to Regulation A, commonly known as “Regulation A+”, which were designed to implement Section 401 of the Jumpstart Our Business Startups Act (JOBS Act). Since then, the SEC issued its final rule, which went into effect earlier in the month. Back in March, I had two main thoughts regarding the proposed rule. First, by proposing that Regulation A+ offerings preempt state registration requirements, the SEC had proposed a securities exemption that may actually prove useful and had a chance to be used in the real world (as opposed to the old Regulation A, which was rarely used). While this aspect of the proposed rule would be attractive to companies raising capital, it would also be controversial with state regulators and investor advocates, so I was concerned that in the final rule preemption of state laws would be rolled back. Second, I was concerned that companies that used Regulation A+ would likely be subject to ongoing Securities Exchange Act reporting (as a fully public company would be), which would reduce the attractiveness of the exemption. [Read more…]
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.
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.
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 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.