How Many Errors Can You Make In 9,000 Words, More Or Less?

The Jumpstart Our Business Startups Act (JOBS Act) is a very modest 9,000+ words.  In comparison, the Dodd-Frank Act is a hefty 360,000+ words.  Thus, I find the number of technical errors in the JOBS Act to be surprising.  One such error is likely to cause some consternation.

Before there was a JOBS Act, a Dodd-Frank Act or even a Sarbanes-Oxley Act, there was a National Securities Markets Improvement Act (NSMIA).  That act amended Section 18 of the Securities Act of 1933 to preempt state authority to require registration or qualification of “covered securities”.  Section 18(b)(4) specifies that securities are covered securities with respect to a transaction that is exempt from registration under the Securities Act pursuant to specified statutes or SEC rules.  Among other things, Section 301 of the JOBS Act added a new Section 4(6) to the Securities Act to exempt crowdfunded securities (provided, of course, that specific conditions are met).  In Section 305(a) of the JOBS Act, Congress prevented the states from requiring qualification or registration of exempt crowdfunded securities by adding a reference to Section 4(6) in the list of exemptions in Section 18(b)(4).

In enacting the JOBS Act, Congress didn’t push the states entirely out of the picture.  In Section 18(c), Congress preserved state authority to investigate and bring fraud actions and to require notice filing of any document filed with the SEC.

Section 305(c) of the JOBS Act amended Section 18(c)(2) by adding a new subdivision (F).  This change is itself puzzling because there wasn’t, and Congress didn’t add, a subdivision (E).  More important, however, is the caption to new subdivision (F) – “Fees not Permitted on Crowdfunded Securities”.  This might lead one to conclude that Congress intended to preclude states from imposing fees with respect to offers and sales of crowdfunded securities that are exempt from registration under the Securities Act.  However, new subdivision (F) states “no filing or fee may be required with respect to any security that is a covered security pursuant to subsection (b)(4)(B)”.  Section 18(b)(4)(B) doesn’t deal with crowdfunding.  Rather refers to the preexisting Securities Act exemption for broker’s transactions.

The JOBS Act has made some unintended changes to the California Corporate Securities Law.  Section 25102.1(c) and (d) recognized federal preemption under the NSMIA by providing that offers and sales of securities pursuant to Section 18(b)(4)(C) and (D) are not subject to qualification under Sections 25110, 25120 and 25130.  However, when Congress added the reference to Section 4(6) in Section 18(b)(4), it didn’t simply tack it on to the end as a new subdivision (E).  Instead, it added the reference as a new subdivision (C) and renumbered the existing subdivisions (C) and (D) as (D) and (E).  Consequently, Section 25102.1(c) now refers the exemption created by Section 4(6) rather than Section 3(a) and Section 25102.1(d) now refers to the exemption created by Section 3(a) rather than rules or regulations issued under Section 4(2).