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The JOBS Act: Whither General Solicitation?

William Carleton, Contributing Editor, VCExperts


Title II of the JOBS Act called upon the SEC to implement rules lifting the ban on general solicitation in Rule 506 offerings, where all purchasers are limited to accredited investors.

This might have been a relatively straightforward instruction, except that Congress also required that the implementing rules must somehow call on issuers to "verify" the accredited status of the purchasers. While at the time no one actually said or intimated that the industry has seen widespread cheating to get around the accredited investor standard - verification was not a concern when the standard was modified by Dodd-Frank a few years back - several floated a vague presumption that went unchallenged: if issuers are tweeting broadly for angel investors, non-accrediteds will get caught up in the hype and lie, or issuers will be somehow inclined to look the other way, even though they didn't when 506 was "quiet."

In practice, of course, the rule against general solicitation had already been bent back so far, it might fairly have been said to already be standing on its head.

One can imagine, with the FundersClub and AngelList no-action letters showing a model that other accredited crowdfunding platforms might follow, that the formal lifting of the ban on general solicitation might never be relevant: those no-action letters don't discuss general solicitation or accredited investor verification. It's as those the SEC staff assumed the entire discussion was taking place under Rule 506(b).

But other portals for accredited investors will want the ban to be formally lifted as the JOBS Act requires. These will be the angel platforms for which it will make sense to rely on Section 201(c) of the JOBS Act, an exemption from federal broker dealer registration requirements that say it's okay, when dealing only with accrediteds, to generally solicit, transact, co-invest and more. Though this section of the JOBS Act has already found its way into the US Code and has in fact been law since the President signed the bill, the way the law is worded, and the unfortunate SEC staff FAQ about Section 201(c), make it important that the ban be formally lifted. Right now, at least on division of SEC staff would appear to take the position that, while angel platforms can do all the things contemplated by Section 201(c), no issuer could actually participate, lest it violate the ban on general solicitation.

It would seem that angel platforms relying on Section 201(c) will be buying into the "noisy" 506.

Anyway, this recap this morning prompted by the item on Broc Romanek's Corporate Counsel blog this morning, assessing conflicting signs on what new SEC Chair Mary Jo White might do about the stalled out rulemaking on the lifting of the general solicitation ban. Might the new Chair be pushing for adoption of the rules proposed in August as interim final rules, as Bloomberg reports? Hard to say.

Side note and prediction: all the attention on general solicitation and verification will put increased pressure on the accredited investor definition itself. Accredited crowdfunding - whether pursuing the models blessed by the no-action letters or relying on Section 201(c) of the JOBS Act - will in fact be hampered in a big way if regulators find a way to narrow the pool of those who qualify as accredited.


William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at http://wac6.com.