Yesterday, the SEC finally announced proposed rules for Title III of the Jobs Act.
As those of you who follow this blog or crowdfunding news in general know, the Jobs Act was enacted in April of 2012 and was supposed to be implemented by SEC rules within 270 days of the law’s enactment. The SEC rules are critical to supply the nuts and bolts of how the Act will work in practice, and the SEC rules have the force of law.
For a number of reasons, however, the SEC failed to meet the 270 day deadline, and as 2013 has grown long in the tooth, proponents of crowdfunding have been wondering if it would ever become reality. Well, now the wait is over…. or, at least, the end of the wait has begun.
On October 23, 2013, the SEC proposed rules for Title III of the Jobs Act – weighing in at a mere 585 pages long. The public is permitted to comment on the rules for 90 days, and anyone can do so on the SEC’s website. How long will this take? Well, in a related matter, the SEC proposed rules this summer relating to Form D, and because the public interest was so great, the SEC has extended the comment period until November 4, 2013. My guess is that the proposed rules on Title III will garner even more interest, perhaps signaling the likelihood that the comment period will be extended for Title III’s proposed rules as well.
By way of brief refresher, Title III of the Jobs Act permits small enterprises, under rules to be established, to raise capital from non-accredited investors (basically, people with less than $200,000 per year income and less than $1 million in net worth). This is a significant change in the landscape of equity investment because, traditionally, a start-up enterprise selling equity shares would typically avoid registering its securities with the SEC (an expensive and time-consuming process) only by utilizing one of a number of “safe harbors.” This generally means selling shares only or primarily to accredited investors – those higher-income individuals. Of course, such a restrictive means of selling securities leaves ordinary Joes out of the investment game and prevents start-up enterprises from seeking funds from the public at large (the “crowd.”)
Skeptics have maintained that there is no way the SEC would permit start-ups to sell securities to non-accredited investors without a blanket of regulation so thick as essentially to smother the freedom from regulatory formalities that true crowdfunding is supposed to embrace. On the other hand, the very purpose of many securities laws is to prevent issuers from taking advantage of investors, which can easily be the case if a seller, a little-known start-up perhaps, is permitted to sell to an unsophisticated investor without any required disclosures.
The skeptics may be correct, at least in part, as the newly proposed rules require the issuer of securities to jump through a few more hoops than proponents of unadulterated crowdfunding may like. It is proposed that an issuer will be able to raise up to $1 million a year from the crowd (non-accredited investors), but that if it raises over $500,000, it must provide audited financial statements, which can be a small hurdle for startups with no accounting history. The issuer must also disclose information regarding its officers and how the proceeds of sale will be used, and it must also release financial statements. In addition, the issuer can only sell through a broker-dealer (a long recognized conduit for sale of securities) or a crowdfunding portal, a new breed that has its own requirements and regulations.
But perhaps a few more hoops is not so bad. As a business attorney, I help small small businesses comply with a variety of regulations which offer far less gain for the business (if any) than crowdfunding seems to offer. Although the proposed rules may be somewhat cumbersome, if they open a door to new possibilities that small businesses have been seeking for so long, the price of admission may well be worth it.
Finally, it should be emphasized that these rules are still only proposed rules. You should certainly speak to a securities lawyer of your choice before offering shares to the crowd! We at Briskin, Cross & Sanford would be glad to assist you.
Hat tip to Reuters.