David Drake of The Soho Loft (a holding company of LDJ Capital), has weighed in with some comments about the changes concerning general advertising with respect to Crowdfunding, resulting from the implementation of the JOBS Act this and next year.
David is one of the founding organizers of the SOHO Loft Crowdfunding Conferences.
These changes fall under the Advertising for Investment Funds section of the Investment Company Act of 1940, which are part of a large body of rules that will be overthrown when the Crowdfunding bill gets implemented.
In what may be an unforeseen consequence of the JOBS Act, funds will be able to advertise to the public as early as July 4th of this year. This comes as changes to Regulation 506 kick in, 90 days after Obama signed the measure into law on April 5th, 2012.
Part of the Act changes the general non-solicitation ban that has been in place since the 1933 SEC Act became law, 79 years ago. Removing this ban allows public advertising for firms applying under Regulation 506 with one stipulation – they may advertise to the general public, but can still only accept capital from accredited investors (today).
Since a previous ruling by the SEC under the Investment Company Act of 1940 (rule 3(c)1 and 3(c)7) identifies those private offerings as Regulation 506 offerings, the same relaxing of the rules will apply to funds as well. Secondly, the JOBS Act provides that offerings under 506 will not be a public offering for purposes of “other federal securities laws.” The 1940 Act would fall under that exemption, essentially making the Regulation 506 changes apply to funds as well.
The SEC will need to address this issue. They may stall and ask for an extension. Alternatively, they could rescind the original ruling that bound the 1940 private offerings under Regulation 506. They could argue that the intent of the JOBS Act was not to affect private offerings. But this is dangerous ground, and it risks lawsuits if the SEC is seen as making what amounts to an unconstitutional change to legislation duly enacted into law.
So, what all of this actually means is that Crowdfunding sites should be preparing to advertise for capital to the general public. As early as this coming Independence day (appropriately enough).
They could say publicly that they have opened Fund I (for example) and they are raising $50 million for the purpose of investing in companies developing “Green Technologies” (for example). There will probably need to be caveats explaining that the offering is only open to “accredited investors”. But, this is the biggest change yet to the SEC Acts of 1933, 1934 and 1940.
Removing the non-solicitation ban introduces a powerful new force into the marketplace. And, it will be followed by laws enabling non-accredited investors to participate in February of 2013 (see below).
The JOBS Act also includes several other significant changes affecting both public and private companies. For example:
• The JOBS Act will allow certain private companies to raise up to $1 million per year via “Crowdfunding” without registering the sales of securities with the SEC. Crowdfunding will permit pooling of small investments from larger groups of investors regardless of whether the investors are accredited or sophisticated.
• The JOBS Act simplifies IPOs by Emerging Growth Companies (EGCs) by, among other things, permitting them to (1) file limited initial disclosures and subsequent reports, (2) provide fewer and less detailed audited financial statements, and (3) reduce disclosures regarding executive compensation. Companies will cease to qualify as EGCs after either five years have elapsed since their IPOs, or they reach $1 billion in annual revenues.
• The JOBS Act expands the use of Regulation A, as an alternative to a registered IPO, by increasing from $5 million to $50 million the amount of capital that companies can raise under that exemption.
• The JOBS Act increases from 500 to 2,000 the number of stockholders of record a company may have before it must register and file quarterly and annual reports with the SEC (provided that no more than 500 of these stockholders are unaccredited investors).
The SEC will continue to adopt regulations implementing new Crowdfunding rules in the coming months, and we will bring them to you here on this blog as fast as they break. Please drop any questions you might have in the comments section below or send me an e-mail to firstname.lastname@example.org, and we will do the best we can to provide answers.