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 SEC (Finally) Issues a Preliminary Rule for Repeal of the Regulation D General Solicitation Requirements
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.
This has raised the ire of Representative Patrick McHenry (R – NC), chairman of the subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs. Rep. McHenry was actually the author of the original crowdfunding provision in the House of Representatives version of the JOBS Act (which was later replaced with a much more watered-down version in the Senate). On August 16, 2012, he wrote a letter to Mary Shapiro, the chairman of the SEC, accusing her of ignoring the law by failing to issue the revisions to Regulation D, which the SEC was required to do, by early July. The letter demands that the SEC turn over all internal documents related to its deliberations on revising Regulation D and that Ms. Shapiro appear before the subcommittee on September 13, 2012.
However, the fact that the SEC was late in carrying out its responsibilities is not the central driving force behind this dispute. The SEC had been scheduled to issue an interim rule on August 22, which would have allowed startups to begin taking advantage of the loosened restrictions while preserving the SEC’s right to continue to solicit public comments and to continue to revise the rule. However, the SEC informed Rep. McHenry last week that instead of issuing an interim final rule, it would release a proposed rule instead. This change would have the effect of further delaying the effectiveness of Reg. D reform, while the SEC collects public comments, which it could use in drafting final rules. But until those final rules are issued, no will be able to take advantage of the JOBS Act Reg. D reforms.
Possibly in response to this letter, the SEC has delayed considering revisions to Regulation D one week until August 29. It is unclear whether this delay is to reconsider the decision to issue proposed final rules as a concession to Rep. McHenry or whether the delay is the result of some other reason altogether.
While not directly linked to crowdfunding, the delay of Regulation D reform, and the subsequent dispute between Congress and the SEC has implications for upcoming crowdfunding regulations. The crowdfunding regulations will be significantly more complex than the Regulation D reforms. The SEC has until the end of 2012 to issue them, but chances are, they will fail to meet this deadline as well. In addition, the crowdfunding law will also require FINRA to issue its own regulations, leading some to speculate that the combination of both agencies’ delays will mean that startups will not be able to take advantage of the crowdfunding law until 2014 at the earliest.
Here are some interesting posts on some other blogs which discuss this point in more detail:
© 2012 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
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.
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...]
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...]