JOBS Act – The Old Rules Still Apply

As we wrote last week, the most exciting provisions of the JOBS Act, at least for private companies–the repeal of the ban on general solicitation in all accredited offerings and crowdfunding–are not yet effective and won’t be effective until the SEC issues new regulations. On the same day we published that post, the Securities and Exchange Commission (SEC) issued a notice reminding everyone that crowdfunding is still unlawful until the SEC adopts new rules implementing the JOBS Act’s crowdfunding exemption.

The SEC Reminder

The SEC notice is short and to the point stating:

“The [JOBS] Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

The SEC hasn’t issued a reminder about using general solicitation in Reg D Rule 506 offerings, but the new rules on that will also not be effective until they are issued in final form by the SEC.

Repeal of Ban on General Solicitation Not Yet Effective Either

If you are currently raising money in a Reg D Rule 506 offering, you also cannot yet use the media to publicize your offering.

Example: You should not announce or post on Facebook or Twitter or LinkedIn that you are trying to raise money, or have raised money and are looking for more to close out your round.

The SEC has 90 days to amend its existing rules to remove the prohibition on general solicitation and advertising in offers made under Rule 506, provided that securities are sold only to accredited investors.

New Rule Complexities

The new law requires that the SEC revise its rules to require companies “to take reasonable steps to verify that the purchasers of the securities are accredited investors, using such methods as determined by the Commission.”

In a recent webcast* on theCorporateCounsel.net, Lily Brown, Senior Special Counsel to the Director from the SEC’s Division of Corporation Finance indicated (although she was careful to say that her views were not the views of the SEC) that under the proposed rules she believed companies were going to have to get more engaged in verifying that their investors were accredited, and that companies were probably not going to be able to rely on a checked-box or a questionnaire filled out by the potential investor.  According to Ms. Brown, the legislative history of the JOBS Act indicates that Congress intended that the process be more involved.  Depending on what the new rules say, this could potentially be a big change from current practice.

Conclusion

The SEC is currently seeking public comment before they propose the new rules.  You can click on this link here to submit a comment to particular parts of the JOBS Act.

*Listen to the full webcast held on April 24, 2012 by following this link (login required).

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • http://adamlieb.me/ Adam Lieb

    I wish more people would state this loudly. I hear murmuring from the less informed folks about how they are going to be crowdfunding their current round. I should just tell them to read your blog.

    • joewallin

      Thanks Adam. Yeah, it is really too bad we have to wait for the SEC to wait. Maybe Congress will do better by startups in 2013. Let us hope!

      • http://adamlieb.me/ Adam Lieb

        Not that I believe anything they say, but didn’t the SEC originally say 6 months from when it was passed to make these rules? Is there any ETA on this?

        • joewallin

          They have already missed one statutory deadline and are about to miss another. Sad.

          • http://adamlieb.me/ Adam Lieb

            This is the same type of deadline as my wife gives me when we are going to dinner? “Adam we need to leave in 5 minutes.” and I write 5 more emails?

          • joewallin

            Sounds like it! Hahahahahaha