By Jim Verdonik
I'm
an attorney with Ward and Smith PA. I also write a column about business and
law for American Business Journals, have authored multiple books and teach an
eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can
check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor
or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW
Thanks for contributions to this update from my partner Knox Proctor.
The Jumpstart our Business Startups ("JOBS") Act
was a bipartisan effort to create jobs by making it easier for start-up
companies to deal with securities laws when raising capital. It was signed by the President on April 5,
2012. Most of the Act's provisions
require the Securities and Exchange Commission ("SEC") to enact rules
to implement those provisions before they become effective.
Did you ever buy a Christmas toy for your children that
had on the box the dreaded words: "Some Assembly Required?"
If so, then you will understand the current status of the
JOBS Act several years after passage:
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Some parts appear to work as intended.
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Some parts seem to be missing.
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We have some extra parts that don't appear to belong
anywhere.
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The assembly instructions were not written by native
English speakers.
The excitement of unwrapping the present wears off if
there is a long assembly process with bumps in the road.
If you cannot get your Christmas gift assembled and in
full working order before Christmas dinner, you begin to wonder:
-
Is the product defective?
OR
-
Are you just a dysfunctional assembler?
The three year delay in implementing major parts of the
JOBS Act is caused in part by both poor design and an assembler that would
really rather be doing something else.
Let's talk about our reluctant assembler first.
The SEC missed all the statutory deadlines for proposing
rules. So far only one of the SEC's
proposed rules has become effective.
That's an impressive delay strategy success rate. A football team trying to hold onto a lead
that is winding down the clock could learn a lot from the SEC. But the SEC is fighting a losing battle. The Internet and Social Media won't
disappear. There is no two minute signal
before the game ends. The influence of
Internet and Social Media grow stronger as these tools permeate our lives while
the SEC's delay and out dated interpretation of the securities laws seem more
foolish day after day. Recently, the SEC
had to surrender to Twitter by permitting issuers that use Twitter or any other
technology that limits the space you can use to link to other documents that
contain required SEC legends that are too long to fit the technology space
limitations. For example, Twitter's 140
character limit.
Temporary delays can be put in the past.
The primary issue is that some of the SEC's proposed rules
(or statements about what the SEC thinks the JOBS Act means) threaten to so
substantially limit the practical usefulness and cost efficiency of some JOBS
Act offerings that the purposes of the JOBS Act may not be achieved.
Not all the JOBS Act's problems can be blamed on a
reluctant SEC. The SEC has been able to
take positions that frustrate the purposes of the JOBS Act, because the statute
contains a number of ambiguities. In
other instances, Congress built in to the statute provisions that make the JOBS
Act very cost inefficient for businesses that are trying to raise capital.
Part of the problem was just poor draftsmanship. But the other driving force was that Congress
was split between two goals: increasing the efficiency of capital raising by
small to mid-sized businesses to defend against allegations by critics that
investor protection is being abandoned.
Investor protection forces in Congress contributed substantially to the
confusing language and unreasonable conditions, which the SEC is relying on to
create restrictive rules.
Before we leave the subject of investor protection, let us
remember that the JOBS Act did not change any anti-fraud rules. What was fraud before the JOBS Act remains
fraud after the JOBS Act. The primary
purpose of JOBS Act is to allow information to be disseminated into the market
using 21st Century technology that most people use every day for both business
and in their personal lives.
Yes, new technologies will be used to commit fraud. But old media and personal contacts were also
used to commit fraud. No system is
perfect as long as fools and their money are soon parted. But any system that tries to always protect
us from our foolish selves will unnecessarily interfere with the ability of
honest businesses to raise capital.
If we do not change the definition of fraud, advocates of
change in securities laws should remember that more information delivered to
more people faster and cheaper in the open where everyone can see it is the
best anti-fraud investor protection system.
Before we review the current status of the JOBS Act and
existing and proposed implementation rules, we should note that Congressional
Committees are working on changes to the JOBS Act. Some of these changes are required to clarify
ambiguous language in the original JOBS Act.
Other changes are necessary to offset SEC interpretations of the JOBS
Act and implementation rules that threaten to negate many of the JOBS Act's
intended benefits.
Notwithstanding our criticisms of some unnecessary
restrictions, we should note that the JOBS Act has already helped many issuers
raise capital. Rule 506 (c) offerings
that use general solicitations are growing in number and size. Likewise, many issuers have benefitted from
the new confidentiality and other rules that govern IPOs and 1934 Act reporting
by emerging growth companies. These are
substantial beneficial changes that should not be overlooked in our zealousness
to make capital raising regulations reasonable and cost efficient in light of
21st Century technology and communications tools and practices.
Although we are giving an updated overview of JOBS Act developments,
it is important to note that most of the provisions in the JOBS Act are not yet
effective. We will provide a further
update when all final regulations are in place.
Note that you will need to consult with a knowledgeable securities
lawyer before you try to take advantage of any of these provisions.
Overview of the
JOBS Act
The JOBS Act is a wide ranging piece of legislation that
amends multiple sections of both the Securities Act of 1933 and the Securities
Exchange Act of 1934. Some Sections of
the JOBS Act became operative when the statute was enacted. Other Sections of the JOBS Act instructed the
Securities and Exchange Commission to write rules implementing these sections.
We discussed above that the fundamental purpose of the
JOBS ACT was to unleash the power of 21st Century communications systems in
capital raising. The JOBS Act also tries
to make it less burdensome for smaller companies to become publicly-held and
remain publicly-held. Conversely, the JOBS
Act allows smaller businesses to remain private even if they have a relatively
large number of shareholders.
The following table summarizes the primary provisions of
the JOBS Act as well as their current regulatory status and some of the primary
issues related to using these provisions.
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JOBS ACT SECTION
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DESCRIPTION
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CURRENT STATUS
AND ISSUES
|
|
Section 201(a)
|
Rule 506 Private Offerings General Solicitation and
Advertising –– Allows general solicitation and advertising of Rule 506 (c)
private offerings that are exempt from registration, if an issuer takes
reasonable steps to verify that all investors are "accredited
investors."
|
Initial SEC Rules approved July 10, 2014 in Release No. 33-9415;34-69959 and
became effective September 23, 2014.
SEC proposed additional rules on July 10, 2013 in
Release No. 33-9416; 34-69960
The initial SEC rules represent a fair attempt to
implement Congressional intent to promote capital-raising.
Investor verification rules are being implemented
without undue burdens and both the number and size of Rule 506 (c) offerings
are growing month by month as more people recognize the benefits.
Proposed SEC rules regarding changes to SEC Form D and
filing all communications with the SEC on the date they occur impose
impractical burdens that will make it difficult and more expensive for young
businesses to comply with the rules thereby exposing companies to liability
risk.
|
|
Section 201 (c)
|
Broker-Dealer Registration Exemption - Affords
exemptions from the requirement to register as a broker under Section 15 (a)
(1) of the Exchange Act to technology platform operators and people who
co-invest in issuers.
|
Became effective immediately.
SEC has not proposed any rules, but the SEC has issued
statements in FAQs that indicate the SEC believes technology platforms that
sell securities in Rule 506 offerings can only be operated by registered broker-dealers
and venture capital funds.
The primary legal issue is whether technology platform
operators should be treated like (i) media outlets or telecommunications
system operators who provide technology enabled services that permit others
to offer and sell securities or (ii) as a broker who actually effects offers
and sales of securities.
Should technology platform operators be treated more
like Merrill Lynch or more like Comcast or Verizon or the Wall Street
Journal?
|
|
Title III
Sections 301 to
305
|
Crowdfunding" –– Allows companies to obtain limited
investments (up to $1 million per issuer per year and up to $10,000 per
investor per year) from the general public (both accredited and
non-accredited investors) without registration, but through strictly
regulated crowdfunding platforms.
Rules regulate both the issuers raising capital and
crowdfunding platform operators.
|
SEC proposed rules on October 23, 2013 in Release
No.33-9470; 34-70741.
Rules not yet effective.
Primary issues with rules include"
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Requiring reviewed and audited financial statements
increases offering expenses to a high percentage of the $1 million annual
limit per issuer.
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Requiring annual filings with the SEC creates ongoing
expense and loss of confidentiality for issuers.
-
Limits in fees operators can charge and ownership of
issuers by platform operators limits operator profits.
-
Limiting off-platform communications by issuers
impedes the sales efforts.
-
Prohibiting platform operators from making
recommendations limits usefulness to investors who seek to find the best
investment opportunities.
|
|
TITLE V
Section 501 to
504
|
Exchange Act Triggers - Increases the maximum number of
record shareholders that, when exceeded, trigger registration and ongoing
reporting requirements under the '34 Act.
|
Rules are working as intended.
|
|
TITLE IV Sections
401 to 402
|
"Small Offerings –– Regulation A+" –– Provides
exemptions for certain smaller offerings of securities.
Primary change is to create different rules for (1)
offerings up to $5 million and (ii) offerings up to $50 million (including
$15 million of shareholder e-sales).
Also exempts the offering from certain state securities laws.
Regulation A offerings were limited to $5 million and
most issuers utilized the more flexible Rule 506 offerings, which has always
provided exemption from certain state securities laws.
Advantages of Regulation A compared to Rule 506
offerings include the ability to sell to persons who are not accredited
investors and the securities investors receive are not "restricted
securities," which makes re-sale easier if there is a trading market.
|
SEC proposed rules on December 13, 2013 in Release
No.33-9497; 34-71120
Not yet effective.
Primary issue will be whether Regulation A can compete
with: the flexibility of Rule 506 (c) offerings or the traditional IPO
process.
May be most useful for small public companies that have
some trading volume, because the securities are not restricted.
|
|
Title I Sections
101 to 108
|
"IPO On-Ramp" –– Grants relief for
"Emerging Growth Companies" in initial public offerings
("IPOs") and in their subsequent reporting and compliance
obligations.
|
Currently effective and has been utilized by most
companies that have done IPOs since it became effective.
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We will address each of these provisions summarized above
in greater detail in this article in the order listed in the table.
For a comparison between the new rules and other
securities exemptions, check out my blog post:
