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 Act. And 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 Startups. And 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.
I’ve always had mixed feelings about the importance of a company announcing a financing in the absence of any other activity. “Dear World: We Just Raised $X From Investors A, B, and C.” Ok, but so what?
In my book, there is only one real reason for this – to attract new potential employees: “We’ve just raised $X and are hiring 20 people including types A through types Q – see our jobs page at jobs.companyname.com and apply now.”
Unfortunately, very few funding announcements are focused on this for two reasons. The first is the stupid one – many entrepreneurs get tangled up in the ego dynamics of a financing (“look ma – we raised money’) and lose sight of the notion that raising money is just one tiny step on the path to success. In my book, once you’ve completed a financing, take a deep breath, tell everyone in the company so they know how much money is in the bank, and then get back to work creating amazing things for your customers.
The second is less stupid, but is something I see over and over again, even with companies we are investors in (and we know better). When you do a financing, you file something called a Form D with the SEC. This process is fully automated which means it is easy for our friends like Dan Primack at Fortune to see any new filings that are made. Dan was one of the first people I knew who regularly published Form D info – it’s now spread widely across most of the VC-based publications, but I’ve give Dan credit for being the most diligent with this (and with many other things he reports on.)
Once you’ve filed your Form D, the data is available on Edgar with a simple search. There are other ways to get it as well since there are plenty of services that republish Edgar data with a better UI for searching. Regardless, the info on Form D is out there on the web.
Some VCs I know claim that you don’t have to file a Form D. Having researched this, I think it’s a dumb move. Most credible attorneys that work with corporate securities, especially those in the VC industry, will insist that you file a Form D if you have more than one investor, or if you have investors in more than one state. In our world, we just tell companies we invest in to file it and not worry about it.
This takes us back to the beginning of the post. For some reason, some companies want to keep their financings quiet. That’s fine – just file your Form D and say nothing about it. It’ll get picked up in the daily VC publications, like Term Sheet and VentureWire. Maybe it’ll end up on TechCrunch if you’ve got some famous investors that they like to write about. And, if your local paper is on the ball, it’ll show up there also. But it’s meaningless – “Joe’s Company Raised $X From Investors A, B, and C according to a filing with the SEC.” Next.
But if you are going to announce your financing, do it right – in conjunction with your Form D filing. Have your jobs page up. Make it clear that you are hiring. If you have substantive stuff to announce around the financing, say an acquisition, a major strategic partnership, or a new product release, announce it at the same time. Substance matters here – the more the better.
Make your noise for a day – and then get back to work creating amazing things for your customers.