On April 5, 2012 President Obama signed the JOBS Act into law.
The SEC’s Rulemaking Duty
Some of the rules went into effect immediately; others are in the drafting process. Within 90 days of the signing of the Act (i.e. mid July), the SEC is required to issue enabling rules as to other portions of the Act, including rules related to general solicitation and advertising of accredited investors under Rule 506 of Regulation D. For the SEC that is the easy part.
Finally, the SEC has up to 270 days (beginning of 2013) to release rules relating to the new crowdfunding exemption and crowdfunding platform portal regulations. That will be difficult part. As a matter of background, the biggest opponents of the crowdfunding bill were the SEC and FINRA. It is easy to see why, the SEC’s mission, direct from their website is:
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The SEC carries out its mission by regulating who may invest, how an issuer can approach an investor and what information and disclosure they must provide to the potential investor. Up until now, that mission has been difficult and complicated to carry out. I have been practicing securities law for nineteen years and can attest that the area is a complicated quagmire of rules and regulations that a practitioner must immerse themselves in on a daily basis to stay proficient.
The Crowdfunding impact
Up until now, the average person, with an average income, could only invest in a company once it is public and generally only once it is subject to the reporting requirements of the Exchange Act of 1934 and then only through a FINRA regulated broker dealer. Restricting the “who may invest”, has been a key component of the furtherance of the SEC mission.
Crowdfunding opens up equity investment in non-public start-up entities to everyone and anyone on some level. Although, personally, I am 100% behind the crowdfunding bill and excited to see how things evolve, I can also 100% see how, to a regulator the crowdfunding bill is a Nightmare with a capital “N”. The SEC now must formulate and create rules and regulations that enact the crowdfunding bill while continuing its mission.
The SEC is however, taking an excellent approach to its daunting task. It is utilizing crowdsourcing to help formulate the crowdfunding rules. That is, it is asking for public input and comments, including any draft rules, and allowing the public to see and comment on the comments. Comments can be submitted and viewed at http://www.sec.gov/spotlight/jobsactcomments.shtml.
In addition, Friday, the SEC had its first, in what will be regular meetings with professionals in the crowdfunding industry, including representative from the Crowdfund Intermediary Regulatory Association (CFIRA) and FINRA. From an informative article on crowdsourcing.org, the following is a summary of Friday’s meeting:
All players have the common goals of transparency and protections for both issuers and investors.
- The SEC is looking at possible requirements to use third-party escrow rather than allowing platforms to hold cash.
- The issue of what will be considered “investment advice” when it comes to screening and other measures taken by platforms was also a topic of interest. What the SEC decides with regard to this topic will impact what services platforms will be allowed to provide and/or charge fees for.
- There was discussion of how and when a 21-day “cooling off” period between initial offerings and the beginning of actual sales will take place.
- It seems likely that platforms will need to register with both FINRA and the SEC.
- The SEC made clear that it is interested in means of verifying and vetting not only platforms, but individual investors as well. The possibility of a “do not invest list” was also mentioned.
- FINRA is currently considering whether it sees itself as a potential regulatory body for crowdfunding.
- There was also discussion at the FINRA meeting of whether or not it will be possible for credit cards to be used on crowdfunding platforms.
Conclusion
The SEC has a huge task in front of them. They must fashion rules that follow the legislative direction passed in the JOBS Act while reasonably continuing to fill their mission. Moreover, and probably most difficulty is that the SEC must fashion rules that not only protect the everyday person investor but that the everyday person can understand, without a law degree. To accomplish this goal, the SEC must have understand the four corners of the Act and have foresight on its execution. As Albert Einstein said “If you can’t explain it simply, you don’t understand it well enough.”
The Author
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.
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