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.
Modern Alternative Investments 