Section 201 of the Jumpstart Our Business Startups Act, or JOBS Act (expected to be signed into law soon by President Obama), requires the SEC to change the rules of a Rule 506 private placement to allow for general solicitation or general advertising so long as all purchasers are accredited investors.
Currently, Rule 502(c) prohibits an issuer in a private placement, or any person on its behalf, from offering or selling securities by any form of general advertising, including any ad, article, or notice published in any newspaper or magazine, on TV, or over the radio.
Depending on how the Commission revises its rules (they have 90 days from enactment), this change could significantly expand the way companies seek investors for private offerings. Imagine cold calls, Internet pop-ups, billboards, and hedge fund ads on TV. Of course the issuer will have to take reasonable steps to verify that purchasers are accredited investors, which is something responsible issuers do anyway.
Proponents argue lifting the ban on advertising promotes transparency, while critics (including key members of the Commission) argue the ban is an important protection against general solicitations reaching unsophisticated investors who may be duped by unscrupulous offers.
The JOBS Act further provides that any person who maintains a platform or mechanism for such advertisements does not have to register as a broker-dealer as long as they receive no compensation in connection with the purchase or sale of a security and do not have possession of customer funds or securities, among other …
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The U.S. House of Representatives, by a vote of 380 to 41, has passed the Jumpstart Our Business Startups Act, or JOBS Act in the form previously approved by the Senate last week. The bill now goes to President Obama, who is expected to sign it into law. The JOBS Act significantly impacts the securities laws, including through a new way to raise money known as “crowdfunding.”
The JOBS Act creates a new securities registration exemption known as “crowdfunding” that issuers can rely on to sell up to $1 million worth of securities to non-accredited investors as long as no individual investor invests more than: (a) $2,000 or 5% of the investor’s annual income in any 12-month period (for investors with annual income or net worth less than $100,000); or (b) 10% of the investor’s annual income or net worth up to $100,000 in any 12-month period (for investors with annual income or net worth in excess of $100,000). And, these “crowdfunders” do not count toward the newly-increased shareholders of record threshold that triggers Exchange Act registration under Section 12(g).
The securities may only be issued through a registered broker-dealer or “funding portal” over the internet that complies with additional requirements. The issuer has certain disclosure requirements during the offering process and following the offering.
Crowdfunding is a popular concept among those who see it as a way to empower smaller investors and smaller companies without access to traditional angel investors. However, regulators, including SEC Chairman Schapiro, have raised concerns …
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In February the SEC issued a Small Entity Compliance Guide that provides a summary of the relatively new net worth standard in the definition of “accredited investor” under the Securities Act, as required by the Dodd-Frank Act. Section 413(a) of the Dodd-Frank Act requires that the value of a person’s primary residence be excluded when determining whether the person has net worth in excess of $1 million in order to qualify as an “accredited investor.”
The Dodd-Frank Act has made it a bit harder to be an accredited investor, and yet the Senate is currently considering a version of the Jumpstart Our Business Startups Act or JOBS Act passed by the House earlier this month that would make it easier for non-accredited investors to participate in “crowdfunding.” The JOBS Act would create a new registration exemption that issuers could rely on to sell up to $1-2 million worth of securities to non-accredited investors as long as no individual investor invests more than the lesser of $10,000 or 10% of the investor’s annual income in any 12-month period. And, these “crowdfunders” would not count toward the 500 shareholders of record threshold that triggers Exchange Act registration under Section 12(g).
Furthermore, for those issuers that want to continue to sell to accredited investors, the JOBS Act would require the SEC to amend Regulation D to permit general solicitation and advertising in Rule 506 offerings sold only to accredited investors.
Both provisions blur the line between public and private offerings and potentially pit …
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