The SEC has issued proposed rules amending Regulation D and Form D.
The proposed rules are deeply flawed in that they will substantially increase the cost and complexity for startups trying to raise money.
How so? The proposed rules make it harder for companies to conduct both non-solicited and generally solicited offerings.
Congress, when it passed the JOBS Act, repealed the ban on general solicitation for all accredited investor offerings. But in doing so, it imposed one condition on companies—that they take additional steps to verify that purchasers of securities were accredited investors.
Originally, Section 201(a) of the JOBS Act simply instructed the SEC to repeal the ban on general solicitation for all accredited offerings, and did nothing more. In a hearing in the House, there was discussion, and a decision to add one sentence.
The one additional sentence was:
“Such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”
The SEC has now determined, in light of comments it received “and the magnitude of the change that the elimination of the prohibition against general solicitation represents to the Rule 506 market”, to re-legislate the deal.
I am pretty sure Congress understood the magnitude of what it was doing and it added one sentence and one sentence only.
Now, instead of just having to take “reasonable steps to verify that purchasers of the securities are accredited investors,” companies will have to do the following, under the proposed rules:
- Make myriad new Form D filings at different stages in an offering for all offerings.
- File in advance with the SEC all solicitation materials for generally solicited offerings.
- Prominently include lengthy legends in any written solicitation materials for generally solicited offerings (forget Tweeting, the legends are too long).
- Include substantially more information on Form D for all offerings.
You can find a description of these additional requirements in my last blog post.
Most unfortunate of all of these items, the proposed rules impose a 1 year prohibition on using Rule 506 in your next offering if you miss a 15 day filing deadline and don’t cure it within 30 days–or if you do cure the miss, you then miss another deadline in the same offering.
This 1-year penalty box provision will be a significant and scary trap for the unwary in the startup ecosystem.
The SEC seems to have forgotten the whole point: The JOBS Act was supposed to have made fundraising easier.
Instead, the rules, if adopted as proposed, will make it harder.
This is not what Congress intended. The SEC should re-visit its entire premise behind issuing these new proposed rules. The proposed rules do not reflect the deal Congress made when it passed the JOBS Act.