Comments In Advance To Rule Making On Elimination On Advertising And Solicitation Ban For Certain Private Offerings
Summary of Title II
Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers. Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively. Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of general solicitations and advertisements, the rule focuses on ensuring that the purchasers qualify.
Like other parts of the Jobs Act, the SEC has been soliciting comments from the public, in advance of rulemaking. I have been reviewing these comments and will continue to share relevant information. As of today the SEC has not published any proposed rules related to Title II (or any part of the Jobs Act for that matter).
National Investment Banking Association (NIBA) Comments
On May 30, 2012, NIBA submitted a comment letter to the SEC addressing Title II. NIBA is a member organization comprised mostly of small firm FINRA members. NIBA, not surprisingly, requests that the rules relating to accredited investor verification be segregated between offerings where a FINRA member acts as a placement agent and where Issuer’s conduct offerings directly. I do not agree with this approach. Certainly, FINRA members already conduct extensive due diligence on both issuers and investors in offerings for which they act as a placement agent. Rather than have two sets of rules, I believe one set of rules, which requires a minimum standard of verification is sufficient, and would most likely already incorporate FINRA members best practices.
Rather than set forth specific verification standards, NIBA suggests that self directed offering Issuers be required to utilize a third-party service to provide accredited investor verification. Although I am sure that these third-party verification providers will (and have already) become available, the SEC would still need to promulgate rules as to exactly how verification is achieved. I see no benefit in forcing an Issuer to use a third party if they choose to conduct the investigation themselves. Moreover, although certainly the current “check the box” and sign the accredited investor questionnaire may not be sufficient, the level of investigation should also not be too onerous.
NIBA also advocates a two option verification approach depending on whether the Issuer utilizes general solicitation or not in its offering. Although NIBA does not make suggestions on the verification process for an offering involving general solicitation or advertising, they do advocate that the current procedures for verification (i.e. Issuer has a reasonable belief that the investor is accredited) remain in place for those offerings not involving general solicitation or advertising. Once again, I do not agree. I believe that it will be too difficult to police and enforce the dual standard and would advocate a single, not overly restrictive, standard for Issuers to follow.
Second Market’s Proposal on Accredited Investor Verification
On May 25, 2012, SecondMarket submitted a comment letter to the SEC addressing Title II. SecondMarket runs a secondary market for alternative investments, including operating a PCMP. SecondMarket is also a licensed broker dealer. Like NIBA, their suggestion is that an Issuer has two options to choose from. The first option would be to conduct a Rule 506 offering without general solicitation or advertising, in which case the Issuer could rely on a reasonable belief that the investor is accredited, such as by submittal of an accredited investor questionnaire, as they can now. The second option would be if the Issuer conducts a Rule 506 offering with general solicitation and advertising, in which case the Issuer could either (i) set a minimum investment amount that would deem to satisfy only accredited investor participation; or (ii) require documentary proof, either directly from the investor, or through a broker dealer intermediary, that such investor is accredited.
The letter submitted by SecondMarket is well thought out and presented. However, personally, I believe that it will be too difficult to police and enforce the dual standard and would advocate a single, not overly restrictive, standard for Issuers to follow.
As noted above, I do not agree with providing two sets of standards for verifying accredited investor status based on whether or not an offering is conducted using general solicitation or not (or whether a FINRA member placement agent is used for that matter). In addition to being difficult to enforce and police, I believe it will add confusion to the Issuers, practitioners and market place as a whole. Part of the confusion will be that exactly what constitutes general solicitation and/or advertising remains vague and undefined. Furthermore, Title II of the Jobs Act carves out an exemption for broker dealer registration, for portals or websites that match accredited investors with Issuers. Is this advertising?
I believe that in order for this system to work the aforementioned aspects must be clear and unambiguous. The process must be streamlined and simplified. Only by simplifying the regulations and process will the goals of the JOBS Act be met which includes both making it easier for businesses to raise money through sales of securities and providing protection to investors.
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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