Articles Posted in JOBS Act

Now that the Securities and Exchange Commission has been ordered by the US Congress to remove the ban on general solicitation, companies will be able to more easily offer their private offerings to the masses for the first time since the 1930’s. The purpose of this is to assist small businesses and start-ups to raise capital.

The lifting of the ban is part of the wider mandate established under the Jumpstart Our Business Startups Act. Firms will be able to advertise to anyone. However, only “accredited investors” in possession of a certain amount of income ($200,000 or $300,000 if married) or with net worth greater than $1 million (primary residence not included) can buy the private offerings.

While the private equity industry says that this change will liberate firms from limitations that restrict entrepreneurship, advocates are worried that investors will be even more at risk of falling victim to high-pressure sales tactics and fraud. They are calling for the SEC to mandate related protections. Even the North American Securities Administrators Association, which represents state securities regulators, reportedly expects private placement fraud cases to go up once the lifting of the ban actually happens.

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.

According to the SEC’s Division of Corporate Finance deputy director Lona Nallengara, a short deadline for rulemaking resulted in its proposal to eliminate the ban on general solicitation and advertising for private placements only tackling the elements ordered by the Jumpstart Our Business Startups Act’s Title II provisions. Nallengara said that the proposal looks at the issues that the Commission considers important to deal with now, and that other issues, such as whether the definition of “accredited investor” needs to be revised and there should be a wider examination of Regulation D offerings and related provisions are likely to be addressed later.

Per the JOBS Act’s Title II, the regulator has put out a proposal that lets issuers generally solicit investors or advertise offerings under Rule 144A and Reg D Rule 506 of the 1933 Securities Act for offerings that are only sold to qualified institutional buyers or accredited investors. However, contrary to what some expected, the Commission didn’t propose a series of steps or a method that Rule 506 issuers can use to verify that purchasers are accredited buyers. Rather, the proposal mandates that issuers take steps that are objectively reasonable to make sure accreditation status is based only on the particular circumstances and facts of the transaction.

Nallengara, who spoke on a CorporateCounsel.net JOBS ACT panel, acknowledged that there are differences of opinion on how strict the verification method for making share that buyers are accredited should be. Issuers don’t want the requirements to be too much of a burden while investors and state regulators want tough safeguards to make sure that only sophisticated investors are buying. He said the SEC is open to comments on the proposed rule’s verification portion. However, he wouldn’t give more concrete details about when the Commission plans to adopt a final rule per Title II (but the comment period, which is 30-days long, places the rulemaking for the proposal on a “faster track.”)

Last week, the SEC proposed rules that would get rid of the ban against general advertising and solicitation of certain securities offerings under Rule 144A and Rule 506 of Regulation D of the Securities Act. The rules are mandated under the Jumpstart Our Business Startups Act.

Currently, companies that want to raise money through securities sales have to depend on an exemption from registration or register the offering with the SEC. The majority of the SEC’s exemptions from registration, including Rule 506, don’t allow companies to take part in general solicitation/advertising related to the securities offering.

However, the newly enacted JOBS Act mandates that the Commission take away the general advertising/solicitation prohibitions on securities offerings related to Rule 506. Section 201(a)(1) of the JOBS Act even directs the SEC to amend Rule 506 to allow general solicitation/advertising as long as the buyers of the securities are investors that are accredited. It also says that the rules shall make sure the issuer exercises reasonable steps to confirm that the buyers are accredited investors and that it is up to the Commission to determine what these methods would be.

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