JOBS Act Update: Equity Crowdfunding Will Have to Wait

Submitted by Paul Winkle

Navocate Business Sales

 

The JOBS Act, signed into law April 5th, 2012 by President Obama has eight Titles (parts).  Title III – Crowdfunding allows businesses (Issuers) to raise small dollar amounts from many investors (the crowd) though registered websites, called funding portals, in return for securities.  While most people have heard of the JOBS Act, they remain unfamiliar with a component which is poised to allow American entrepreneurs and business owners create American jobs.  Wikipedia states: “The Jumpstart Our Business Startups Act or JOBS Act is a law intended to encourage funding of United States small businesses by easing various securities regulations.”

Rule 506 is of particular importance to crowdfunding. When The JOBS Act was enacted, it directed the Securities and Exchange Commission to remove the prohibitions on general solicitation or general advertising for securities offerings relying on Rule 506. By requiring the SEC to remove these restrictions, Congress sought to make it easier for companies to inform the public that they are seeking to raise capital through the sale of securities.

Yesterday, the SEC met to “consider whether to propose rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act.”

During the 45 minutes meeting, the majority of commissioners voted in favor of proposing rules to eliminate the prohibition against general solicitation and general advertising in rule 506 and rule 144a offerings.

Commissioners Paredes and Gallagher, who both voted in favor of proposing rules, commended the Division of Corporate Finance for their hard work but also voiced concern about the delays in promulgating the rules. Both commissioners had expected interim final rules be in place already to allow Issuers capital access under the Title II of the JOBS Act.

The SEC missed the first deadline of July 4th prescribed in the Act to enact rules. Furthermore the Commission elected to vote on proposed rules yesterday instead of enacting interim final rules.  Yesterday’s topics were originally scheduled to be discussed August 22nd.

The Commission will seek public comment on the proposed rules for 30 days prior to promulgating final or interim final rules.  Representatives from the Division of Corporation Finance expressed an interest in public comments particularly involving the approach an Issuer would be required to use to verify accredited investor status.

Charles Kwon from the Commission’s Division of Corporation Finance proposed Issuers be provided flexibility in determining if an investor is accredited.  Issuers would be required to take “reasonable steps” to verify that purchasers of the securities are accredited investors and should  consider the facts and circumstances of the transaction.  Mr. Kwon stated an issuer be objective when determining the accredited nature of the purchaser.  Some criteria he mentioned the Commission may use to determine if an Issuer took reasonable steps in that determination are:

• The amount and type of information that the issuer has about the purchaser.
• Type of purchaser (accredited, institutional, etc.) that the purchaser claims to be.
• Terms of investment, such as a minimum investment amount.
• Method used to solicit purchaser.

Further recommendation was made that the Commission not require a specific verification method or use a non-exclusive list since it would be impractical and overly burdensome and might lead to a standardized form.

A current verification method used to determine if an investor is accredited is a self-authenticating questionnaire which is sent to the purchaser by the issuer or representative of the issuer.  A full definition of accredited investor.

It’s easy to understand why entrepreneurs and small business owners remain confused about how they should proceed, and what steps they should begin addressing now, in order to be prepared to take advantage of equity crowdfunding. To help with that preparation, CrowdFundingRoadmap and Laughlin Associates are hosting a one of a kind Crowdfunding Bootcamp to prepare entrepreneurs with the key elements they need to be ready to crowdfund under the new crowdfunding bill. Details for the event can be found at Crowdfunding Bootcamp.

About Navocate

Navocate provides Business Sales and Acquisition services for Emerging Companies with revenues from $3M - $30M. Specifically, Navocate focuses on the market segment above business brokers, and below investment banks.