Articles Posted in JOBS Act

The US Securities and Exchange Commission wants to up by 10 times how much money companies can raise via a simplified public offering. Under their proposal, firms could raise up to $50 million, instead of just $5 million, while giving investors less disclosures than what public companies are obligated to provide. The measure, which has just been issued for public comment, is the Jumpstart Our Business Startups Act’s last big requirement.

The JOBS Act was established to assist small business in going public and raising capital. Currently, it lets the SEC preempt states from overseeing Regulation A offerings if only “qualified” buyers are allowed to purchase the the deals or if they are offered via a stock exchange. However, the SEC has to approve the offerings and companies employing the exemption have to get approval by regulators in each state where shares were sold. It is this review by the states of Regulation A deals that reportedly have been a biggest hassle because each state has its own standards for whether to approve offers.

It was Congress and the 2012 Jumpstart Our Business Startups Act that mandated revisions to the Commission’s Regulation A so that investors will want to get behind smaller companies. According to a Government Accountability Office report, in 2011, the number of businesses trying to raise money under the current rule dropped to 19—way down from the 116 businesses that did in 1997. Some said that the requirements were too strict for how much money they were allowed to raise.

SEC Member Presses Regulator to Stick to Its Core Mission When Figuring Out Priorities

Securities and Exchange Commission member Daniel Gallagher wants the regulator to focus more on its mission when determining its regulatory agenda. He said that the SEC’s three mandates must always be considered: maintaining markets that are efficient and fair, making capital reform happen, and protecting investors.

Speaking at a AICPA/SIFMA Financial Management Society Conference, Gallagher said the agency should remove credit rating references from its rules, start reassessing the US market structure, put into place proxy advice reform, set up a new Regulation A Plus exemption, take a closer look at fixed-income regulatory issues, and reassess its disclosure regime. He believes that excessive credit rating dependence was a central cause for the failure of securitized products that led to the 2008 economic crisis. Gallagher says that the SEC should have taken out the credit ratings references years before the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Beginning today, September 23, the SEC’s ban on general solicitation is no longer in effect. Those raising funds for corporations can now publish equity offerings on websites for crowdfunding, as well as blog and tweet about them. The move comes in the wake of the Jumpstart Our Business Startups Act, which was passed last year.

That said, even with the lifting of the general solicitation ban, raising funds for companies will likely remain a difficult endeavor. Funds can only be raised from investors that are accredited, and now, the latter will have to show proof that they fulfill the wealth criteria for accreditation by having an income greater than $200K during the last two years or a net worth of $1M (the value one’s primary residence is not included.)

Would-be fundraisers will need to provide extensive disclosure of offerings not just to the Commission, but also to the public, and there will be tight restrictions and the risk of penalty of a yearlong fundraising ban for violations. Also, in order to avail of being able to engage in general solicitation, startups will have to file a Form D with the regulator at least 15 days prior to starting to solicit. An amended Form D will have to be turned in within 30 days after the termination of an offering.

10 Democrats in the US Senate are calling on the Obama Administration to delay a proposal by the Department of Labor involving retirement plan-related investment advice until after the SEC makes a decision over whether to put out its own proposal about retail investment advice. The Commission is looking at whether it should propose a rule that would up the standard for brokers who give this type of advice. The lawmakers are worried that the two rules might conflict and obligate investment advisers and brokers to satisfy two standards.

Meantime, the Labor Department is getting ready to once more propose a rule that would broaden what “fiduciary” means for anyone that gives investment advice about retirement plans. Its previous proposal in 2010 met with resistance from the industry and some members of Congress. Even now there are also Republican lawmakers that want the DOL to wait until after the SEC makes a decision.

Commission Chairman Mary Jo White says she would like the agency to make this decision as “as quickly as we can.” Also, earlier this month she said it would be “premature” to talk about whether the regulator will change or withdraw a recent proposal to amend Regulation D to improve requirement for companies wanting a more relaxed general solicitation arena.

State Securities Regulators and others are battling over how the US Securities and Exchange Commission should create a $50 million offering cap for exempt offerings under regulation A. The Jumpstart Our Business Startups Act had ordered the SEC to establish the new exemption but gave no deadline. Referred to by SEC staff as “Reg A Plus,” the agency’s Division of Corporation Finance rulemaking team has been working on the measure.

In a letter, the North American Securities Administrators Association urged the regulator to refuse to succumb to some commenters’ requests that state securities regulators not be included when it comes to the new exempt offerings. NASAA believes that state regulator oversight is key to making sure that these offerings are part of a successful public marketplace.

The letter, written by NASAA President A. Health Abshure, was in response to comments calling on the Commission to define what is a “qualified purchaser” under the 1933 Securities Act so that new offerings (or at least part of them) would be exempt from state blue sky registration. Abshure believes that limited state oversight for the new exemption would make it easier for scammers to use this exemption. He also says that making the securities freely tradable could increase the chances of financial fraud and abuse, which is why state regulation is so important.

According to the SEC Division of Corporation Finance’s Office of Small Business Policy chief Gerald LaPorte, Commission staff are working hard to create under Reg A a new $50 million offering cap as soon as possible, even without a hard deadline. LaPorte, who expressed his own views at a Jumpstart Our Business Startups Act rulemaking panel at the American Bar Association Business Law Section, said that a lot of people had “high expectations for this exemption.”

Right now, public offerings of up to $5 million get registration exemption under the regulation. Under the JOBS Act’s Title IV, the SEC has to allow for exempt offerings as high as $50 million under Reg A.

Per LaPorte, the Commission will have plenty of discretion regarding how to put Title IV into effect. He said that SEC staff is looking into questions that commenters have sent in via pre-rulemaking letters, including whether reporting companies should be able to apply the new exemption, there should be a periodic reporting regime for the new cap, who should trigger reporting duties, and how similar Reg A reporting should be to crowdfunding reporting. LaPorte said that too many similarities could cause confusion for market participants.

Officials representing consumers, union, and state groups are threatening legal proceedings should the Securities and Exchange Commission’s proposed Rule 506 of the Jumpstart Our Business Startups Act becomes final. They strongly opposed the proposed rule, which is supposed to implement the JOBS Act’s Section 201, which takes away the bars on general solicitations and general advertising for securities offerings that are exempt from registration, per Regulation D’s Rule 506, as long as certain provisions are satisfied. The group officials say that they considered the proposal so flawed that they want the SEC to withdraw the rule, amend it, and propose it again.

Proposed rule 506 gives a safe harbor for Section 4(2) of the Securities Act of 1933’s private offering exemption. Companies that avail of the exemption can raise an unlimited sum of investor funds as long as they are in compliance with certain provisions. However, the groups’ officials don’t believe that the proposed rule gets specific enough about the reasonable steps that issuers must execute to make sure that only accredited investors are the ones that buy the issued securities. They also don’t think that it protect investors enough from the greater fraud risk related to the implementation of the law. (For example, they want private funds to be subject to more restrictions when it comes to seeking capital and advertising to the public.) The group leaders also said that the term “accredited investors” is not defined in a manner that protects the investing public.

Recently, both the SEC and the Commodity Futures Trading Commission had the experience of having the rulemakings they implemented, per the Dodd-Frank Wall Street Reform and Consumer Protection Act, vacated by federal court judges. Questions that were raised included those involving the thoroughness of one rule’s cost benefit analysis and whether an appropriate enough job of comprehending Congressional intent was done when developing regulation. Even the North American Securities Administrators, which considers the SEC to be its partner, would consider a lawsuit against the Commission if proposed Rule 506 were to go through.

Participants at the D.C. Bar panel on June 21 talked about whether the Jumpstart Our Business Startups Act is going to increase private placements but at a cost to public markets. The JOBS Act, which was enacted in April, facilitates the IPO process for emerging growth companies, ups the threshold for activating registration requirements, creates, under Regulation A, new exempt securities of up to $50 million, and gets rid of the general advertising and solicitation restrictions for Regulation D Rule 505 offerings.

Meantime, Attorney Tyler Gellasch, who is Sen. Carl Levin’s (D-Mich.) counsel (he was clear to articulate that his views are his own and don’t necessarily reflect the opinions of the senator), also said that he doesn’t expect there to be a lot of IPOs with this easing of rules for private offerings. He noted that while changes to Reg D Rule 506’s offerings would broaden the world of private securities, the greater threshold now provided for issuer registrations under the 1934 Securities Exchange Act has “significantly” reduced the impetus for going public.

Gellasch believes that many investors have become mistrusting of IPOs in the wake of so many of them lately not performing well upon completion of their first year. The controversies this year involving the IPOs of Facebook (FB) and BATS Global Markets Inc. haven’t helped.

He also talked about how Congress failed to perform its own cost-benefit analysis when it enacted the statute and that no extensive hearings took place about the new requirements. Among the unforeseen circumstances that have already developed are the efforts that have been made reverse merger companies to employ the on-ramp provisions to obtain a foothold in US markets.

Gellasch said that JOBS Act brings up questions that it fails to answer, such as whether the benefits that the act creates for some entities should also be given to other entities that are similar and involved in analogous circumstances. (For example, while mutual fund advertising continues to be very regulated, hedge funds are getting to avail of fewer restrictions imposed on their advertising.) He also wondered about who is now responsible for supervising Rule 506 offerings, determining whether advertisements and solicitations are accurate, and ensuring that offerings don’t turn into boiler rooms as they relate to the act’s crowdfunding provisions.

Gellasch wants to know who will now be liable for investor losses.

JOBS Act Will Increase Private Placements But Not Help Public Markets, Panelists Say, Bloomberg/BNA, June 22, 2012

The JOBS Act (PDF)


More Blog Posts:

Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Investor Advisory Committee Members Warn the Commission Not to Neglect Its Rulemaking Duties Even While Working to Implement the JOBS Act, Institutional Investor Securities Blog, June 21, 2012

Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

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The Jumpstart Our Business Startups Act’s Title II eliminates the general solicitation and general advertising ban for offers and sales of private offerings under 1933 Securities Act Rule 144A and Reg D Rule 506 as long as the offerings’ buyers are accredited investors. Now, five investor groups have written a letter to the Securities and Exchange Commission recommending that when the regulator implements this change, it should “enhance the standards” that issuers have to adhere to when confirming that only accredited investors are buying the offerings. The groups are the Consumer Federation of America, Fund Democracy, AFL-CIO, Consumer Action, and Americans for Financial Reform. They believe that such enhancements are necessary because removing the ban will significantly decrease investor protections even as fraudulent behavior is likely to increase.

Right now, the SEC is in the process of writing rules for the new requirements that come with the statute. It has 90 days from April 5, when the JOBS act was enacted, to implement Title II. While under the statute’s Rule 506, the offerings’ issuers are required to take “reasonable steps” to confirm that buyers are accredited, Rule 144A issuers only have to “reasonably believe” that the buyers are qualified institutional purchasers. In their letter, the investor groups argued that Congress most certainly intended for the Commission to set up more rigorous the standards for identifying accredited investors. They are recommending that at the very least, the SEC substantially increase the Rule 506’s accredited investor standard for individual investors in each of the two most recent years to at least $400,000 in yearly income (up from at least $200,000) or $2.5 million in net worth, with the primary residence’s value subtracted (up from $1 million). They also said that the Commission should mandate that issuers that decide to engage in general solicitation and advertising file Form D in advance, enhance filing and recordkeeping requirements having to do with buyers’ accredited investor status, and think about excluding non-accredited investors from taking part in all Rule 506 offerings.

Offering different perspectives from these investors groups are securities lawyers and business groups. For instance, the National Investment Banking Association is pressing the SEC to make sure that any rule promulgated on the verification process is one that issuers of all sizes can meet. Meantime, the Securities Industry and Financial Markets Association wrote a letter to the SEC in April arguing that the steps that Title II requires shouldn’t create a greater burden than the existing “reasonable belief” standard of Rule 506. The American Bar Association Business Law Section’s Federal Regulation of Securities Committee said in its letter that what are considered reasonable steps should be determined by circumstances, facts, and the accredited investor category that applies. The group believes that the Commission’s rules should reflect existing practices and customs that take such factors into consideration.

Members of the Securities and Exchange Commission’s Investor Advisory Committee are cautioning that it is imperative that the SEC not ignore its rulemaking obligations that it was tasked under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act even as it seeks to implement the new capital formation statute. The Jumpstart Our Business Startups Act was enacted in April.

The investor advisory committee, which is a new group at the SEC that was created under Dodd-Frank to provide the Commission advise about regulatory priorities, disclosure requirements, and investor protections, held their inaugural meeting on June 12. The committee takes the place of a prior one that was disbanded in 2010.

The JOBS Act
The JOBS Act is focused on helping smaller businesses gain access to capital. Per the statute’s Title II, the SEC has to allow general advertising and solicitation for private placement sales and offers under 1933 Securities Act Rule 144A and Regulation D Rule 506 as long as the buyers are accredited investors. The SEC’s Division of Corporation Finance associate director and chief counsel Thomas Kim has said that staff members are in the process of trying to determine how to practically implement the requirements so that investor protection isn’t compromised even as issuers are given some flexibility. Also, seeing as status or assets have resulted in a number of “prongs” for determining which entities or individuals are “accredited investors,” Kim noted that it was “reasonable” that issuers would take different steps to confirm accreditation depending on the accredited investor’s category.

Kim also spoke about how the crowdfunding rulewriting deadline of 270 days, which the SEC was given (under Title III of the JOBS Act) to come up with a registration exemption for crowdfunding, which involves “crowds” of investors sourcing small fund amounts, would be challenging to meet. A regulatory framework currently exists for the Title II modification to Rules 144A and Rules 506. However, the SEC would have to essentially make up from “whole cloth” a regulatory structure that incorporates disclosure requirements, funding portals, and other aspects from a completely new category of exempt offerings.

“An intense battle is being fought in Congress over Dodd-Frank efforts to ‘re-regulate’ the securities industry after the debacle caused by the ‘deregulation’ of that industry over the previous decade,” said Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd. Many believe such changes, if any, are months if not years away. Meanwhile, legislation to lower the bar in the issuance of new securities is sailing through at breakneck speed – proof positive as to who our representatives represent.”

SEC Must Not Forsake Dodd-Frank For JOBS Act, Investor Panel Members Say, Bloomberg/BNA, June 20, 2012

JOBS Act (PDF)

More Blog Posts:
SEC Chairman Schapiro Says Jumpstart Our Business Startups Act Needs Better Investor Protections, Institutional Investor Securities Blog, March 21, 2012

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive, Stockbroker Fraud Blog, May 12, 2012

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