Articles Posted in JOBS Act

The US Securities and Exchange Commission wants to up by 10 times how much money companies can raise via a simplified public offering. Under their proposal, firms could raise up to $50 million, instead of just $5 million, while giving investors less disclosures than what public companies are obligated to provide. The measure, which has just been issued for public comment, is the Jumpstart Our Business Startups Act’s last big requirement.

The JOBS Act was established to assist small business in going public and raising capital. Currently, it lets the SEC preempt states from overseeing Regulation A offerings if only “qualified” buyers are allowed to purchase the the deals or if they are offered via a stock exchange. However, the SEC has to approve the offerings and companies employing the exemption have to get approval by regulators in each state where shares were sold. It is this review by the states of Regulation A deals that reportedly have been a biggest hassle because each state has its own standards for whether to approve offers.

It was Congress and the 2012 Jumpstart Our Business Startups Act that mandated revisions to the Commission’s Regulation A so that investors will want to get behind smaller companies. According to a Government Accountability Office report, in 2011, the number of businesses trying to raise money under the current rule dropped to 19—way down from the 116 businesses that did in 1997. Some said that the requirements were too strict for how much money they were allowed to raise.

SEC Member Presses Regulator to Stick to Its Core Mission When Figuring Out Priorities

Securities and Exchange Commission member Daniel Gallagher wants the regulator to focus more on its mission when determining its regulatory agenda. He said that the SEC’s three mandates must always be considered: maintaining markets that are efficient and fair, making capital reform happen, and protecting investors.

Speaking at a AICPA/SIFMA Financial Management Society Conference, Gallagher said the agency should remove credit rating references from its rules, start reassessing the US market structure, put into place proxy advice reform, set up a new Regulation A Plus exemption, take a closer look at fixed-income regulatory issues, and reassess its disclosure regime. He believes that excessive credit rating dependence was a central cause for the failure of securitized products that led to the 2008 economic crisis. Gallagher says that the SEC should have taken out the credit ratings references years before the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Beginning today, September 23, the SEC’s ban on general solicitation is no longer in effect. Those raising funds for corporations can now publish equity offerings on websites for crowdfunding, as well as blog and tweet about them. The move comes in the wake of the Jumpstart Our Business Startups Act, which was passed last year.

That said, even with the lifting of the general solicitation ban, raising funds for companies will likely remain a difficult endeavor. Funds can only be raised from investors that are accredited, and now, the latter will have to show proof that they fulfill the wealth criteria for accreditation by having an income greater than $200K during the last two years or a net worth of $1M (the value one’s primary residence is not included.)

Would-be fundraisers will need to provide extensive disclosure of offerings not just to the Commission, but also to the public, and there will be tight restrictions and the risk of penalty of a yearlong fundraising ban for violations. Also, in order to avail of being able to engage in general solicitation, startups will have to file a Form D with the regulator at least 15 days prior to starting to solicit. An amended Form D will have to be turned in within 30 days after the termination of an offering.

10 Democrats in the US Senate are calling on the Obama Administration to delay a proposal by the Department of Labor involving retirement plan-related investment advice until after the SEC makes a decision over whether to put out its own proposal about retail investment advice. The Commission is looking at whether it should propose a rule that would up the standard for brokers who give this type of advice. The lawmakers are worried that the two rules might conflict and obligate investment advisers and brokers to satisfy two standards.

Meantime, the Labor Department is getting ready to once more propose a rule that would broaden what “fiduciary” means for anyone that gives investment advice about retirement plans. Its previous proposal in 2010 met with resistance from the industry and some members of Congress. Even now there are also Republican lawmakers that want the DOL to wait until after the SEC makes a decision.

Commission Chairman Mary Jo White says she would like the agency to make this decision as “as quickly as we can.” Also, earlier this month she said it would be “premature” to talk about whether the regulator will change or withdraw a recent proposal to amend Regulation D to improve requirement for companies wanting a more relaxed general solicitation arena.

State Securities Regulators and others are battling over how the US Securities and Exchange Commission should create a $50 million offering cap for exempt offerings under regulation A. The Jumpstart Our Business Startups Act had ordered the SEC to establish the new exemption but gave no deadline. Referred to by SEC staff as “Reg A Plus,” the agency’s Division of Corporation Finance rulemaking team has been working on the measure.

In a letter, the North American Securities Administrators Association urged the regulator to refuse to succumb to some commenters’ requests that state securities regulators not be included when it comes to the new exempt offerings. NASAA believes that state regulator oversight is key to making sure that these offerings are part of a successful public marketplace.

The letter, written by NASAA President A. Health Abshure, was in response to comments calling on the Commission to define what is a “qualified purchaser” under the 1933 Securities Act so that new offerings (or at least part of them) would be exempt from state blue sky registration. Abshure believes that limited state oversight for the new exemption would make it easier for scammers to use this exemption. He also says that making the securities freely tradable could increase the chances of financial fraud and abuse, which is why state regulation is so important.

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.

According to the SEC Division of Corporation Finance’s Office of Small Business Policy chief Gerald LaPorte, Commission staff are working hard to create under Reg A a new $50 million offering cap as soon as possible, even without a hard deadline. LaPorte, who expressed his own views at a Jumpstart Our Business Startups Act rulemaking panel at the American Bar Association Business Law Section, said that a lot of people had “high expectations for this exemption.”

Right now, public offerings of up to $5 million get registration exemption under the regulation. Under the JOBS Act’s Title IV, the SEC has to allow for exempt offerings as high as $50 million under Reg A.

Per LaPorte, the Commission will have plenty of discretion regarding how to put Title IV into effect. He said that SEC staff is looking into questions that commenters have sent in via pre-rulemaking letters, including whether reporting companies should be able to apply the new exemption, there should be a periodic reporting regime for the new cap, who should trigger reporting duties, and how similar Reg A reporting should be to crowdfunding reporting. LaPorte said that too many similarities could cause confusion for market participants.

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.

Officials representing consumers, union, and state groups are threatening legal proceedings should the Securities and Exchange Commission’s proposed Rule 506 of the Jumpstart Our Business Startups Act becomes final. They strongly opposed the proposed rule, which is supposed to implement the JOBS Act’s Section 201, which takes away the bars on general solicitations and general advertising for securities offerings that are exempt from registration, per Regulation D’s Rule 506, as long as certain provisions are satisfied. The group officials say that they considered the proposal so flawed that they want the SEC to withdraw the rule, amend it, and propose it again.

Proposed rule 506 gives a safe harbor for Section 4(2) of the Securities Act of 1933’s private offering exemption. Companies that avail of the exemption can raise an unlimited sum of investor funds as long as they are in compliance with certain provisions. However, the groups’ officials don’t believe that the proposed rule gets specific enough about the reasonable steps that issuers must execute to make sure that only accredited investors are the ones that buy the issued securities. They also don’t think that it protect investors enough from the greater fraud risk related to the implementation of the law. (For example, they want private funds to be subject to more restrictions when it comes to seeking capital and advertising to the public.) The group leaders also said that the term “accredited investors” is not defined in a manner that protects the investing public.

Recently, both the SEC and the Commodity Futures Trading Commission had the experience of having the rulemakings they implemented, per the Dodd-Frank Wall Street Reform and Consumer Protection Act, vacated by federal court judges. Questions that were raised included those involving the thoroughness of one rule’s cost benefit analysis and whether an appropriate enough job of comprehending Congressional intent was done when developing regulation. Even the North American Securities Administrators, which considers the SEC to be its partner, would consider a lawsuit against the Commission if proposed Rule 506 were to go through.

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 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.”)

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