Buzz

The JOBS Act: Word Is Getting Out That The Sec May Be Looking To Stymie General Solicitation

William Carleton, Contributing Editor, VCExperts



Word is getting out that the general solicitation cake has a firecracker in it.

The "firecracker" is a wholly unexpected SEC release proposing new rules that would grossly undermine the usefulness of the lifting of the ban on general solicitation.

Let's be clear: Last week the SEC did indeed issue final rules, not subject to any further comment but only a 60 day waiting period following publication in the Federal Register.

These final rules establish new Rule 506(c) for angel offerings involving general solicitation. As required by Congress, these new rules also lay out standards for verification of accredited investor status. So that particular Congressional mandate from the JOBS Act is done.

But some lawmakers and many regulators don't like the idea of general solicitation, not at all.

So, while dutifully (if tardily) appearing to check off one more mandate from the JOBS Act, the Commission at the same time, on its own initiative, proposed rules to overhaul Form D filing requirements and require the posting to an SEC site of all written materials used in connection with a 506(c) offering.

Probably the most onerous change proposed is a pre-filing requirement for Rule 506(c) offerings. That makes the new rule very much unlike angel investing and takes 506(c) deals out of the natural flow of discussion and negotiation, particularly with regard to seed financings. If these proposed changes take effect, startups, the best ones, will stick with 506(b), which has no pre-filing requirement.

And there are other gotchas in the proposed changes to Reg D and Form D.

This firecracker, the unwanted surprise of new changes to Reg D, is an unforced error on the part of the SEC. Congress struck the right balance by requiring verification for offerings using general solicitation, and the agency should not retrade this legislative decision.

I still think some people are confusing general solicitation with crowdfunding. They are not the same thing at all. Information requirements are part of Title III, and the idea there was to protect unaccredited investors.

In Title II, now implemented by Rule 506(c), the idea was that angel investors could fend for themselves. Unaccredited investors, those who need protection, can't be hurt, because they're not allowed to participate. That may be undemocratic but that is essentially how angel investing has worked for decades now.

No question Congress wanted all kinds of disclosures and advanced filings and new penalties imposed on crowdfunding for unaccredited investors. But Congress never asked the SEC to impose information requirements on Rule 506 offerings. The only Congressionally-imposed catch to lifting the ban on general solicitation was a new requirement to verify the accredited status of all purchasers.

That "catch" is in Rule 506(c). It would be better to drop the proposed rules entirely than permit them to go into effect and undermine Congressional intent.

Photo: Tanya Dawn /Flickr.


William Carleton

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