Overview of Recent Regulatory Action Implementing the JOBS Act
Enactment of the Jumpstart Our Business Startups Act (JOBS Act) in April 2012 made headlines across the nation. The JOBS Act is designed to reduce capital raising restrictions faced by many companies, both by loosening regulations governing private securities offerings and by easing the road to public securities offerings for so-called “emerging growth companies.” The JOBS Act implemented sweeping changes to various aspects of the Securities Act of 1933, as amended (Securities Act), the Securities Exchange Act of 1934, as amended (Exchange Act), and other related laws and regulations. Many of the most significant provisions of the JOBS Act required implementation by the Securities and Exchange Commission (SEC) by deadlines specified by the Congress when adopting the JOBS Act. Much of the initial buzz and excitement surrounding the JOBS Act has waned, as many of those deadlines have long-since come and gone.
Despite the wait, we are now seeing significant movement from federal and state regulators towards implementation of key provisions of the JOBS Act designed to encourage capital raising outside of registered public offerings. This Alert highlights these activities.
SEC Issues Interpretations on New General Solicitation Rules. The SEC’s Division of Corporate Finance recently issued 11 new Compliance and Disclosure Interpretations (CDIs) in response to the adoption of new Rule 506(c) and amended Rule 144A. These changes, as stipulated by Title II of the JOBS Act, broaden the use of general solicitation in certain private offerings. These CDIs provide additional fact-specific guidance on how to navigate certain aspects of the new and amended rules which became effective in September.
Nine of the CDIs provide guidance on how to interpret the new Rule 506(c) general solicitation provisions in specific circumstances. Among other things, the CDIs clarify the manner by which issuers might switch between the use of Rule 506(c) offerings and those not involving general solicitation. Significantly, if the conditions of Rule 506(c) are not met and the issuer engaged in general solicitation, the Securities Act Section 4(a)(2) private offering exemption would not be available to the issuer. In addition, the Division confirms that written verification of a purchaser’s status as an accredited investor can be provided by an attorney or CPA that is licensed or registered in a jurisdiction outside of the United States.
Two of the CDIs provide guidance on amended Rule 144A. These confirm that general solicitation may be conducted by the issuer as well as the initial purchasers involved in a Rule 144A offering (conducted through Section 4(a)(2) or Regulation S) and that the amendments to Rule 144A did not change how directed selling efforts under Regulation S are analyzed in concurrent Rule 144A and Regulation S offerings.
We will continue to monitor developments under the new offering regimes enabling the use of general solicitation. Please contact us if you would like further information.
Regulation A+ Activity Anticipated. Recent reports indicate that the SEC is in the process of finalizing proposed rules to implement “Regulation A+” offerings. As established by Title IV of the JOBS Act, Section 3(b)(2) of the Securities Act provides for an exempt public offering of up to $50 million within a 12-month period. The SEC is required to adopt rules to implement these provisions, which are expected to address (at a minimum) the types of disclosure required to be filed with the SEC and provided to investors in connection with such offerings. In addition, the North American Securities Administrators Association (NASAA)—the voluntary association that serves as the voice of state securities agencies on issues of capital formation and local investor protection and whose membership consists of 67 state, provincial, and territorial securities administrators—recently proposed a coordinated review program for Regulation A+ offerings. Pursuant to Section 3(b)(2), Regulation A+ offerings must comply with state securities laws (“blue sky” laws) unless the securities are offered and sold on a national securities exchange or offered and sold to a “qualified purchaser” (a term yet to be defined by the SEC). The coordinated review program is being proposed as an effort to maximize efficiency and coordination among the states in an effort to make for Regulation A+ offerings more attractive to issuers who are required to comply with blue sky laws of multiple states.
We will monitor the activity related to Regulation A+ implementation and provide updates accordingly.
Crowdfunding Regulations Pending from the SEC and in North Carolina. In late October, the SEC proposed rules to implement the “crowdfunding” provisions found in Title III of the JOBS Act. Title III created the Section 4(a)(6) exemption from registration under the Securities Act for certain crowdfunding securities offerings conducted through “crowdfunding intermediaries,” including the newly created entity called a “funding portal.” These proposed rules and regulations impose restrictions on companies looking to raise capital through crowdfunding as well as the crowdfunding intermediaries. At the same time, the Financial Industry Regulatory Authority (FINRA) solicited comments on proposed rules and forms that would govern funding portals.
The SEC’s proposed crowdfunding regulations are detailed, complex, and (encapsulated in a nearly 600 page release) lengthy. The SEC has solicited additional comment on 295 specific items relating to the proposed rules and regulations. Although the comment period is scheduled to expire on February 3, 2014, we cannot predict when the SEC will issue final crowdfunding rules or whether those rules will deviate from current proposals in any significant way.
In June of this year the NC House of Representatives approved HB 680, the Jumpstart Our Business Start-Ups Act (NC JOBS Act) by an overwhelming bipartisan vote of 103-1. Representative Tom Murray, one of the sponsors of the bill, described the NC JOBS Act as a “safe, fair, and easy-to-implement securities law exemption that enables crowdfunding as a new type of financing for North Carolina small business and start-ups.” Designed to utilize the federal intrastate offering exemption, enactment of the NC JOBS Act would not be dependent on implementation of the SEC’s “crowdfunding” rules discussed below. The NC JOBS Act is in committee review but will be eligible for consideration by the NC Senate in the 2014 short session that begins in May 2014.
For a summary of key aspects of each of these crowdfunding proposals, please CLICK HERE. Since the regulations are still in the proposal and comment stage, we do not cover all of the detailed aspects of the proposals, which, if adopted, would impact the manner in which companies can raise money through crowdfunding or act as funding portals in the process.
Expect to see a more thorough discussion of both the substantive and procedural aspects of these rules once the regulatory parameters become more certain. In the meantime, we remind you that, until the SEC’s rules on crowdfunding become effective, issuers and intermediaries may not rely on the exemption provided under Section 4(a)(6) to conduct offerings. Please contact us if you would like further information about the proposals discussed in this Client Alert.