JOBS Act Implementation Finally UnderwayJuly 17, 2013
On Apr. 5, 2012, the President signed into law the JOBS Act. This bipartisan legislation is designed to substantially reduce the regulatory impediments to small firms’ access to investor capital. Properly implemented by the SEC and the Financial Industry Regulatory Authority (FINRA), it will dramatically improve small companies’ access to capital and reduce their cost of capital.
Rule 506 General Solicitation
The first rule adopted by the SEC would implement the JOBS Act provision eliminating the prohibition against general solicitation and general advertising in private placements made under Rule 506 of Regulation D. Title II of the NSBA-supported JOBS Act required the SEC to have completed this rulemaking over a year ago. This provision of the JOBS Act allows small businesses to use the internet or newspapers to seek accredited investors for their business once the SEC has issued rules (which it now has done). In general, an accredited investor is an institution or an individual with a residence exclusive net worth of $1 million or more or an annual income (joint) of $300,000 or more. Businesses will, however, be required to take “reasonable steps” to ensure that investors are accredited investors.
The new rule provides a “non-exclusive” list of three ways to satisfy the requirement to take reasonable steps to verify the status of an investor as an accredited investor. They are:
- With respect to income, reviewing copies of tax forms that report the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year;
- With respect to net worth, obtaining bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments or appraisal reports issued by independent third parties to verify assets and, to verify liabilities, a consumer report from at least one of the nationwide consumer reporting agencies combined with obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed; or
- receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that they have taken reasonable steps to verify the purchaser’s accredited status.
Rule 506 Bad Actor Rule
The SEC adopted a second rule limiting the ability of “bad actors” to engage in Regulation D Rule 506 private placements. In general, the final disqualification rule covers criminal convictions or final regulatory orders finding fraud or other significant securities law violations by:
- the issuer;
- directors and certain officers, general partners, and managing members of the issuer;
- 20 percent beneficial owners of the issuer.
- promoters; and
- persons compensated for soliciting investors as well as the general partners, directors, officers, and managing members of any compensated solicitor.
Proposed Regulation D Information Reporting
Finally, the SEC adopted a proposed rule that places a series of information reporting requirements and other requirements regarding the content of offering documents on Regulation D private placements. This rule was opposed by Commissioners Paredes and Gallagher as placing too great a regulatory burden on small businesses seeking capital. They argued that it may outweigh the good done by the JOBS Act.
NSBA will provide comments to the SEC on this proposed rule and seek to minimize the adverse impact of this proposed rule in other ways.
JOBS Act Crowdfunding
The SEC was required by the JOBS Act to issue final rules implementing Title III of the JOBS Act governing crowdfunding by the end of 2012. It has not done so. It is not clear when the SEC will meet this requirement but implementation soon appears unlikely because the rules that must be written are much more complicated than the Title II general solicitation rules just adopted and the SEC has demonstrated that it does not feel particularly bound by Congressionally mandated deadlines.
JOBS Act II
NSBA is also working with Congress to develop a “JOBS Act II” designed to address a number of securities law problems not addresses by the JOBS Act.
To read the two final rules and the proposed rule and the SEC “Fact Sheets” summarizing the rules, click here.
To read NSBA comments to the SEC on the JOBS Act, click here, here, here, here, here and here. To read NSBA testimony to Congress regarding the general solicitation provisions of the JOBS Act, click here.