The Proposed SEC Rules Undermine The Goal Of The JOBS Act

The JOBS Act, which was approved by Congress and signed by President Obama with much fanfare over a year ago, was intended to help small business. It is, after all, called the Jumpstart Our Business Startups Act. A number of the provisions have been slow to get written into law and the SEC has missed their deadlines on a bunch of stuff, including the often talked about equity crowdfunding activity.

Recently, the SEC weighed in on a number of the things they were required to with much fanfare. Fred Wilson wrote Let The Games Begin in response to the SEC lifting the General Solicitation Ban. However, Fred, and many others, missed the new proposed Amendments to Regulation D, Form D and Rule 156 under the Securities ActAnd they look like one scary mess that could undermine the whole thing if approved.

Some posts with analysis of this have finally started to appear. A good summary is by Joe Wallin at his Startup Law Blog titled Proposed Rules Hard on StartupsAnd I’ve gotten a number of emails with similar analysis. My favorite summary was from a very experienced law firm.

“The SEC giveth (as mandated by Congress) and taketh away (by its own mandate).

It is incredible that the SEC finally got around to implementing rules to remove the ban on solicitation (as it was required by statute to do so in 2012), but concurrently proposes new rules intended to retard the benefits of easing the capital formation process (the goal of the JOBS Act).

The new proposed rules will require a Form D to be filed 15 days in ADVANCE of a Reg 506 offering and after, substantially expand the scope of information required to be disclosed in Form D and disqualify an issuer from relying on Rule 506 for one year if the issuer does not comply with the new filing requirements (including a requirement that the Form D be timely filed). The new rule also would require filing with the SEC of all written general solicitation materials. So much for deregulation!”

Seriously? More commentary from one of the emails I received follows:

“The new rules and rule proposals were a kind of packaged effort to address the Congressional mandate in the JOBS Act, while attempting to maintain investor protection. Apparently, the package was enough to mollify Commissioner Walter, but Commissioner Aguilar was unwilling to go along. In his view, the rules adopted come at the expense of investor protection. He reiterated that the record supports the argument that elimination of the ban on general solicitation will facilitate fraud and viewed the adoption of the rules without appropriate safeguards as “reckless.” He also contended that the proposal to study the practical effects and then adopt rules if necessary would come too late – closing the barn door after the horses have already escaped. Although he voted for adoption of the disqualification rule, he also objected to the narrowing of the categories of individuals covered, as well as the application to only prospective events, especially given the two-year delay in adoption of the final rule. On the other side of the aisle, Commissioners Paredes and Gallagher both objected to the proposal to facilitate monitoring of market changes resulting from elimination of the prohibition. They both viewed the proposal as placing an undue burden on capital formation and undermining the objectives of the JOBS Act.”

While the “proposed rules” are still “proposed”, hopefully the SEC will reject these new proposals, especially in the context of Congress’s mandate to Jumpstart Our Business Startups.

  • You nailed it.

    • That was never the deal. The idea was, since angel investors could fend for themselves, the ban on general solicitation, in deals in which only accredited investors could be purchasers, makes no sense. Unaccredited investors, those who need protection, can’t be hurt, because they’re not allowed to participate. That may be undemocratic but that is essentially how angel investing has worked for decades now.

      I wonder if you have crowdfunding in mind. No question Congress wanted all kinds of disclosures and advanced filings and new penalties imposed on that. But Congress never asked the SEC to impose information requirements on Rule 506 offerings. The only Congressionally-imposed catch to lifting the ban on general solicitation was a new requirement to verify the accredited status of all purchasers.

  • Felix Dashevsky

    Agree that folks are jumping the gun without understanding the new hurdles. But I also remain mystified by the excitement over the JOBS Act generally. Looking broadly, it will do more harm than good. The harm everyone mentions is the fraudulent solicitations. Sure, but I would focus even more on dubious propositions (i.e., not intentionally misleading, but guaranteed money losers/fund-me-for-a-year schemes). And that’s meant to be weighed against “democratization of startups.” Perhaps I am naive, but I can easily grasp how a fast-talker with a TV ad (or a snazzy online presence) can siphon off the proverbial pensioners’ money. At the same time I struggle to understand how a cash-starved founder will be helped by this (even if he is able to blast Facebook ads about his idea). Or why an investor is helped by a reduction in information. I have personally experienced this. As a direct investor, all my questions are welcomed and answered by the founder him/herself. When investing via … (well, let me reserve their name for propriety’s sake) Online Fundraising Service X, I am told to look at a pre-packaged website that has a video and a list of founders. My follow up questions are spurned (and, hence, I did not invest).

    As an aside, the VC community may be aided here. The funds will be able to advertise more broadly (and will have the wherewithall to comply with the new hurdles), and be able to keep portfolio companies private deeper into the financing cycle. I suppose that indirectly helps the startups. But I fail to see any sort of massive direct capital formation.

    • Felix – I share your overall skepticism about this aspect of the JOBS Act.

  • Brad, thank you for mentioning my post.

    We all need to write really good comment letters to the SEC.

    I’ve already alerted I think almost a half a dozen elected members of the House.

    You might also like this post:

    But, I think our best path now is really good comment letters to the SEC.

    The 1 year automatic penalty box is insane.

    • Great post on the WSJ Accelerators. I know a lot of folks are working on comment letters.

      • That’s good. The 1 year sit, it is way over the top. How about requiring public apology letters instead? :] anything…

  • Interesting post from the Angel Capital Association titled New SEC Rules Could Kill Angel Investing –

  • As much as I respect institutional investors, equity crowdfunding for first round financing would be amazing. Fraud happens; I still get the email spam. There is definitely room for intellectual generosity toward new investors that need to learn how to perform some level of due diligence. This debacle is another example of the false dichotomy of teaching and protection.

    • There are going to be a TON of information and pre-filing requirements for crowdfunding. The SEC has no choice on this – it is built into the legislation, part of what makes Title III of the JOBS Act so very long.

      But angel investing, Rule 506(c) deals which by law are strictly limited so that only accredited investors may be purchasers, for that, Congress mandated no information requirements. Congress only required that issuers take reasonable steps to verify the accredited status of purchasers.

      So the shame of these newly proposed SEC rules are that they are an unforced error, introducing crowdfunding-like information and pre-filing requirements into an area of private investing where the investors can be counted on to fend for themselves.

  • I don’t think the JOBS Act was ever designed to create actual jobs. It was political theatre designed to create more bureaucracies and paperwork.

    Actually taking the handcuffs off capital is extremely frightening to a bureaucrat that has an economic interest in keeping handcuffs on. Free markets are extremely messy. There are winners and losers and no one can control who will win or lose. Government doesn’t like that.

    This isn’t confined to one political party. Politicians are afraid of risk. There is a slice of the Republican Party that is waking up. They are starting to build momentum. Hint: It’s not the McCain/Graham/Romney/Bush/Nixon/Rove part of the party.

    It would be great if the Democrats could get a similar faction together. Then classical liberals and lovers of independence and freedom might be able to get good things done.

    • sigmaalgebra

      But, but, but you don’t understand:
      If all the DC lobbyists, bureaucrats,
      staffers, owners of high end bars
      and restaurants suddenly quit
      holding hands, then the whole
      country, even the world, would
      fall apart!

  • sigmaalgebra

    Brad, no, no, no, the real fundamental
    root cause of your recent malady is the
    total FUBAR, SNAFU of the SEC!

    My solution: Regard the SEC and nearly
    all the rest of DC as some absurd
    comedy theater one should try to

    • Absurd comedy theater is the right phrase for it.