SEC Crafts Investor Solicitation Rules Under JOBS ActAugust 8, 2012
Title II of the recently-passed JOBS Act amended Rule 506 of Securities and Exchange Commission (SEC) Regulation D (relating to private placements) to allow general solicitation or general advertising seeking investors provided that the issuer takes “reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.” Accredited investors are generally institutions or individuals with either an income of $200,000 annually ($300,000 joint) or a net worth of $1 million or more (excluding the value of the investor’s residence).
The importance of Title II of the Act is often underrated. Typical small-business owners know a limited number of accredited investors (i.e. very affluent people). They are thus effectively forced by the securities laws’ pre-existing relationship requirements to pay broker-dealers large fees to make introductions to potential investors. Title II of the law will allow entrepreneurs, should they choose, to try to directly seek accredited investors over the internet or by advertising in, for example, the Wall Street Journal.
On Aug. 22, the Commission will meet to consider how to amend Rule 506 to comply with the JOBS Act. In a meeting with NSBA staff in July, SEC staff indicated that they were considering imposing onerous requirements on issuers who advertise or seek accredited investors on the internet.
The usual practice for the last four decades has been for companies to require investors to fill out an investor suitability questionnaire and to require investors to sign a statement certifying that the investor has sufficient income or net worth. The SEC is considering requiring investors to provide tax returns, certified net worth statements or otherwise document their income or net worth prior to investing and to potentially impose liability on companies that do not catch investors who lie about their income or net worth. How this would actually work is so far undetermined. It is, however, clear that the expense of compliance, risk to the issuer and privacy concerns under such a regulatory regime would impede the ability of small firms to raise capital. Potentially, such rules would apply to all Regulation D offerings and therefore make access to capital more difficult rather than easier as Congress intended. NSBA is opposed to these requirements and has filed comments with the SEC urging them not to adopt onerous requirements. NSBA is seeking to generate opposition to such a rule.
It is important that small firms express support for the JOBS Act and caution the SEC against imposing complex, costly regulations or creating legal risk to issuers and crowdfunding portals. NSBA has developed draft comments small-business owners are encouraged to personalize and use in filing their comments with the SEC.
To file comments, simply click here and input your contact information and comments.
Click here to downnload NSBA’s draft comments.
To read NSBA’s August 2nd comments on accredited investor verification, click here.
To read NSBA’s comments on implementing the JOBS Act generally, click here.
Click here for the notice of the Aug. 22 meeting.