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Earlier today, the SEC voted 4-1 to lift the ban on general solicitation for private securities deals.
The ruling creates a new kind of offering, called 506(c), that effectively allows companies (as well as hedge funds and other asset managers) to advertise private securities offerings to accredited investors. Congress mandated the SEC to lift the 80-year ban on general solicitation in Title II of the JOBS Act, which passed in April 2012.
The rules will not go into effect until 60 days after they are published in the Federal Register.
The lifting of the general solicitation ban is one of the first major steps in implementing rules mandated by Congress in the JOBS Act, though it has not been without controversy. Some worry that allowing issuers to advertise their offerings (even if they are targeted only at accredited investors) will lead to an increase in fraudulent activity. Indeed, that was the reason for Commissioner Luis Aguilar’s dissenting vote, who said he was “disappointed and saddened by the reckless adoption” of the rule.
Perhaps in an attempt to mollify such concerns, the SEC also ruled on two other items this morning.
The first was the “bad actor” rule (approved 5-0) required by the 2010 Dodd-Frank Act, which disqualifies securities offerings involving “felons and other ‘bad actors.’”
The second ruling addressed Form D, which currently issuers must file with the SEC after they first sell their securities. The SEC passed a proposed set of changes to Form D by a vote of 3-2; the rules are not finalized, and the SEC is soliciting comments about the changes over the next 60 days.
The proposed rules will require issuers that make use of the 506(c) offering to file Form D 15 days in advance of advertising – not selling – their shares, and to provide more information about their company. This ruling is clearly tied to the lifting of the general solicitation; because it is only proposed and may change following the 60-day comment period, it could push back the lifting of the general solicitation ban, adding further delays.
William Carleton, who runs the blog Counselor @ Law and live-blogged this morning’s meeting, described the proposed set of rules around Form D as “very troubling” for startups and early stage companies.
“If you have to file [Form D] in advance ... you’re telling the investors they have a waiting period where they have signed off on the deal, but you can’t sell it yet and can’t even advertise it yet,” Carleton told Crowdsourcing.org. He continued:
Either that, or you’re going to file terms of the deal before you advertise it, perhaps in connection with private conversations with someone you didn’t advertise to, on the hope that an investor doesn’t later make you change it. So [the new Form D] introduces an additional complexity that may not be a big deal when we’re talking about a $20 million Series B or Series C that is led by existing investors who can thrash out terms at the board level before circulating, but it doesn’t make a lot of sense for a seed stage financing. Also, if seed stage companies get locked in to filing a bunch of prospective information with the SEC ahead of time, are they going to have the same freedom to pivot that most startup companies – all the successful ones I can think of never ended up succeeding in doing what they thought they were going to do when they launched. I’m sounding cynical, but I’m not sure lifting the ban on general solicitation in 506(c) is going to be attractive to a lot of issuers.
Reflecting on how this might affect Title III of the JOBS Act, Carleton added:
“General solicitation is not permitted under Title III… you can’t have off-channel communications or promotions. There’s kind of an irony there – taking the crowd out of crowdfunding. You’d think that crowdfunding would begin with the premise that [companies can] generally solicit and advertise. The stage was set, in my own personal view, by the JOBS Act, and it’s playing out now the way these rules are being implemented, that the real crowdfunding action is going to be among accredited investors.”
Not all were as discouraged by the proposed Form D rules, however. Joanna Schwartz, CEO of EarlyShares, a crowdfunding platform that currently allows accredited investors to invest in companies, said, “In our view, the new Form D filing requirement is a small hurdle for entrepreneurs to overcome, relative to the benefits of being able to advertise their offering.”
Despite his reservations around the proposed Form D rules, Carleton said that, overall, today was a step in the right direction for the implementation of the JOBS Act.
“As long as the old 506 is preserved, having an alternative where people can generally solicit and advertise, even if there are extra [requirements] – having that alternative is probably a good thing,” he stated.
Schwartz also said she was pleased with today's rulings:
“Our initial response is, of course, that we’re excited and enthusiastic. It’s a huge first step in taking the JOBS Act from vision into reality, and a major step forward to democratizing finance for entrepreneurs in the United States.”
Others echoed the positive sentiment.
“Kudos to [SEC chairman] Mary Jo White for moving forward and implementing the new rule,” Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council, told Crowdsourcing.org. “It’s definitely good news for entrepreneurs and startups who can cast a wider net, if you will, of investors.”