On the “Access to Capital for Job Creators Act” (H. R. 2940) Now Before Congress — Part 2

In Part 1 of this blog entry, I wrote about the background to and the provisions of H.R. 2940.

In this Part 2, I will write about what this bill may mean to the small and midsized business, as well as the bill’s present status.

What the Bill May Mean

By amending Section 4(2) to make irrelevant the presence or absence of general solicitation or general advertising to the availability of the exemption, Congress is materially changing 80 years of federal securities law.

That isn’t necessarily a misbegotten idea.

But it also is likely, in my opinion, to create unforeseen adverse problems even while it definitely creates foreseeable benefits.

The bill is labeled a “Job Creators” act, and I think it is easy to imagine how it might ignite a gold rush for private placements. And when one ponders the synergy with HR 2930, the prospects become even brighter. I think that is why the sponsors have the boldness to call this a “Job Creators” bill.

For purposes of this section, it is important to bear in mind that not only small businesses, but also large, global, public companies can -- and often do -- privately place securities under Section 4(2) and Rule 506. HR 2940 may not change how those large issuers behave, if they continue to only approach the big investors already known to them. On the other hand, those big issuers would be able to do so without worrying about whether they are “whispering” about the offering to a select few or shouting out loud about it to the general public (although this is one of the areas where the SEC will find the devil in the details, I believe, as large issuers may try to use their newfound freedom to test or even “condition” the market in ways the SEC thought it long ago closed down).

This blog, and our firm’s business, looks toward small and medium sized enterprises, so that is what I want to consider here.

The opportunity lies obviously in removing a condition -- some might call an impediment -- to raising capital for private ventures. Under present law, an entrepreneur, a small ongoing business, a large enterprise, any kind of commercial endeavor, can only present a potential or actual offering to a relatively small, preselected group of investors. That works fine if you are trying to raise capital from friends and family or a small number of institutional investors with which you already have commercial or investment ties. With, however, the explosion of social media -- refer again to HR 2930 -- businesses large and small today can reach crowds of potential investors unapproachable before now.

But as we have seen with the loosening of Rule 504, to suddenly and completely remove the restriction on general advertising opens up a huge new fishing pool for ventures in search of capital.

And because Rule 506, unlike Rules 504 and 505, enjoys the benefits of federal preemption of state securities laws (too much to discuss in this blog) and no cap on the amount an issuer can raise, Rule 506 has already become the primary Regulation D avenue for nonpublic offerings.

Now a business seeking to raise funds under Rule 506 can rent space in a convention center, advertise on the internet, television, radio and newspaper an introductory meeting and investment opportunity at that location, and welcome hundreds of prospective investors to listen to its plans. No more having to identify the offerees first, establish a preexisting relationship, or hire a broker to do that for you.

The only way Rule 506’s changes would adversely affect that business is that, by engaging in general solicitation on the front end of the offering, it could not sell securities to non-accredited investors on the back end of the offering. (Rule 506 has long allowed an issuer to sell to not more than 35 non-accredited investors, in addition to an unlimited number of accredited investors.) So any business considering availing itself of the greater free speech opportunities presented by the proposed modification of Rule 506, must at the same time consider that it would lose a segment of potential buyers for a Rule 506 transaction.

On the other hand, if HR 2940 becomes law, an issuer could engage in a statutory private placement free of the old “no general solicitation or advertising” element, meaning that the same issuer would still have the chance to sell to non-accredited investors, only not under the safe harbor of Rule 506.

As for the apparent conflict in the first part of HR 2940 -- the elimination of general solicitation or general advertising as a condition for a nonpublic offering -- and the second part of HR 2940 -- the reinsertion of that condition, in a modified form, in a rule adopted under that statutory provision -- I can only comment that Congress can write tortured laws. How can an agency adopt a rule imposing a condition which the statute says is irrelevant? I suppose that, in this case, the agency can adopt such a rule because Congress specifically authorizes the agency to do that very thing.

Where the Bill Stands Now

The bill was approved overwhelmingly in the House of Representatives in November 2011 and was sent to the Senate. The President has publicly endorsed it.

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