Title II Rulemaking Back on the Priority List?

According to Bloomberg, Mary Joe White, the U.S. Securities and Exchange Commission’s newly appointed chairwoman, has turned her attention to Title II of the JOBS Act.

By way of background, Title II of the JOBS Act  lifts the ban on “general solicitation” in private offerings under Rule 506 of Regulation D. Present law, which has been in effect more or less since legislative reaction to the Great Depression in 1933, prohibits a company that is raising money in a private raise (as opposed to, say, an IPO) to reach out to investors about its offering, unless the company has a previous, substantive relationship with those investors.  So, you can call your rich uncle or email your former boss — but if you were to post on Facebook that your company is raising money, you would likely blow your company’s exemption and jeopardize the validity of the entire fundraising round.

Title II of the JOBS Act, once finally enacted, is intended to change that. Although Congress left the details for the SEC to work out, the general notion behind Title II is that fundraising companies should be permitted to solicit whomever they want, by whatever means they prefer (Facebook, Twitter, radio ads, nailing pamphlets to front doors), so long as they don’t actually permit somebody to invest unless the company has verified that this person is an accredited investor.  (For a refresher on who is an accredited investor, see here.)

In other words, Congress directed the SEC to modify the rules so as to focus not on the relationship between the company and the investor, and not on the ways in which the company found the investor, but rather, on whether the investment opportunity is suitable for each investor. If the investment is suitable for the investor (generally, because the investor has enough wealth that she/he can afford to make risky investments), then who cares how the company located the investor?  This strikes us as a sensible acknowledgement of the way people and networks actually communicate in the age of social media.

Congress instructed the SEC to enact Title II by July of 2012.  The SEC missed this deadline, though they did release these proposed rules in August of 2012, and asked for public comments on the rules. But since then, not a lot has happened. From our understanding of the inside politicking, the conversation has been a heated one.  Proponents of the rule are anxious for it to be finalized ASAP to facilitate easier capital formation in this fledgling economic recovery, while opponents are concerned that the rules as proposed do not have enough built in investor protections.  The Bloomberg article cited above goes into greater detail on this conversation and some of the inside baseball involved.

The present debate seems to turn on whether to finalize these proposed rules as is (which would be the fastest way to enact Title II), and then make incremental changes to the rules over time as needed, vs. going back to the drawing board and creating a new set of rules, which would further delay implementation of Title II but would create the opportunity to build in some protections and features that some advocates believe to be beneficial.  We’d like to see the former approach taken — the rules aren’t perfect, but they aren’t bad, and we believe that they are a good enough starting point. We believe the benefit to our nation for its small businesses to gain greater access to growth capital (and its investors to gain greater access to true portfolio diversification) outweighs whatever marginal improvements could be made to the wording of the rules.

But, whether the SEC finalizes the August 2012 proposed rules or drafts new ones, either way we’re glad to see some forward progress on the Title II front. Between last November’s elections, the departure of former SEC chairwoman Mary Shapiro shortly thereafter, and the process of appointing and confirming her replacement, it was widely expected that SEC rulemaking activity would slow down during Q4 of 2012 and Q1 of 2013 — and so it did.  But now that Mary Jo White has been appointed to replace Mary Shapiro, things seem to be moving forward again. This is a good thing, no matter which way the Title II rules break.

We’ll keep you updated on any new developments.

Flashback: Grofolio presentation at [i4c] Campaign Finals

A year ago, Grofolio, then Funding Launchpad, presented to an audience of 1,000 as part of the [i4c] Campaign finals at Denver’s Ellie Caulkins Opera House. This presentation’s focus was the potential social impact of expanding access to capital to America’s startups and growth companies.

Overview of ‘Accredited Investor’

After the Securities Act of 1933 was established, companies wishing to sell securities must register with the Securities and Exchange Commission (SEC).  There are certain exemptions to registration, outlined in Regulation D of the Securities Act. Regulation D Rule 506, the most widely used exemption, allows securities to be sold without registering with the SEC, so long as the securities are being purchased by accredited investors.

The definition of an “accredited investor”, as given by Investopedia, is:

…investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings…

Regulation D Rule 501 provides the parameters for accredited investors:

• An individual, or an individual and their spouse, possessing a net worth greater than $1 million at the time of purchase.  The value of their primary residence must be excluded from their total net worth.
• An individual who for the past two years has earned an income greater than $200,000. Or an individual and their spouse who jointly earned greater than $300,000. Individually or jointly, investors must expect the same level of income for the current year.
• Banks, business and small business development companies, insurance companies, or registered investment companies.
• Charitable organizations, corporations, or partnerships which possess assets exceeding $5 million.
• Employee benefit plans which meet the requirements of the Employee Retirement Income Securities Act.  A bank, insurance company, or registered investment advisor (see above) must be making the investment decisions if the plan possesses total assets less than $5 million.
• Directors, executive officers, or general partners of the company selling the securities.
• Trusts with assets in excess of $5 million which were not formed for the purpose of acquiring the offered securities.  A sophisticated person must also be in charge of making those purchases.
• Businesses where all equity owners are accredited investors.

Grolio is a digital marketplace that makes it easier and more efficient than ever for accredited investors to find alternative investments to diversify their portfolios.  Sign up now to be notified when we launch.