Picking up our continuing blog coverage on securities law capital raising changes for small business:
The Jumpstart Our Business Startups Act (JOBS Act), designated H. R. 3606, passed the Senate last week in amended form, and today the House approved the amended bill. So if the President signs it -- as he has announced he is ready to do -- this Act will soon become law.
Although not lengthy, the JOBS Act has several distinct sections, and this blog entry will focus only on that thread previously known as H. R. 2940, Access to Capital for Job Creators Act. H. R. 2940 was woven into H. R. 3606 as Title II of the JOBS Act. I will write later about that thread previously known as H. R. 2930 (Entrepreneur Access to Capital Act) and commonly called the "CrowdFunding Act." And then I will give a review of the JOBS Act's remaining sections, at least insofar as they will affect private, and not public, companies.
I wrote weeks ago about H. R. 2940, and the substance of 2940 carries over into 3606 as passed by Congress: eliminating the prohibition on "general solicitation" or "general advertising" in CERTAIN REGULATORY (Rule 506) private placements.
Both 2940 and 3606 give the SEC 90 days after the Act's enactment to revise Rule 506 of Regulation D to eliminate the general solicitation prohibition as a condition of offerings under 506 provided that sales are made exclusively to accredited investors. So an issuer that wants to cast a wide net for potential investors, instead of relying on the much smaller "preexisting relationship" bucket of potential investors, will be free to advertise on the internet, television, newspaper, billboards, cold calls, etc. Those lengthy confidentiality provisions at the beginning of PPMs and the numbering of PPMs to trace their travel only into the hands of designated offerees can become a thing of the past. On the other hand, that issuer will lose the capability to include up to 35 non accredited investors among its purchasers. (It appears that an issuer can still avail itself of the 35 non accredited purchaser room under 506 if it foregoes general solicitation.)
So far, so good: the original House version survived into the final Act.
But 2940 would have stricken the general solicitation prohibition from ANY offering made under Section 4(2) of the Securities Act, not only from Rule 506 offerings. 3606 does not go this far; indeed, it takes an opposite tack. Where 2940 would have revised the statute, then ordered the SEC to make conforming changes to the regulation, 3606 revises (rather instructs the SEC to revise) the regulation and then amends the statute to conform with the modified regulation.
3606 accomplishes this by amending Section 4 of the Act to provide that offers and sales made under Rule 506 won't be considered public offerings as a result of general solicitation or general advertising (although they still theoretically could be considered public offerings for other reasons).
And 3606 goes on to further amend Section 4 of the Act to create a safe harbor for (put a leash on?) intermediaries that help an issuer carry out or help investors locate, or both, a Rule 506 offering. They will NOT be required to register as brokers or dealers solely because they provide a platform (think website) by which offers, sales, solicitation, and advertising take place; invest in the securities; or provide "ancillary services" with respect to the securities. Ancillary services means due diligence services or standardized documentation; put another way, the provider acts more like a finder or neutral broker than as an agent of the issuer (expressly barred from negotiating terms). But the intermediary can receive NO compensation from a purchase or sale and cannot take possession of the purchase cash or issued securities (and cannot be a "bad boy" as defined under the 1934 Act).
3606 clearly imagines that general solicitation will catch on under Rule 506, nurturing the handful of "private placement dating rooms" now operating online and attracting many new ones to the party. It seems a good idea to me, to lay out the boundaries for these "catalysts" of startup incubations, by establishing which activities will NOT make you a broker/dealer (and, by implication, establishing that anything beyond these bright lines WILL make you a broker/dealer subject to federal registration). To allow issuers the freedom to advertise, but leave the "Mad Men" advertising consultants without a safe way to participate, might hobble the power of Title II of the JOBS Act.
That is all for now.