SEC Lifts Ban on General Solicitation for Certain Private Offerings

by Partridge Snow & Hahn LLP
Contact

Background

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law.  The JOBS Act is intended to “increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.”  To accomplish this goal the JOBS Act seeks to ease the application of various securities regulations to startups and other small, privately-held businesses.  Titles II and III are probably the most important (and closely-watched) parts of the JOBS Act for startups and growth-stage companies in the U.S.

Title II – Access to Capital for Job Creators  

The SEC recently voted in favor of implementing Section 201(a) of the JOBS Act, which lifts the ban on general solicitation and permits startups – and other privately-held companies – to openly advertise to the general public that they’re raising money in private offerings. 

Until now, such activity was prohibited unless (and until) a company decided to “go public” by registering its securities in an IPO.  A startup can now advertise its privately-offered securities under new Rule 506(c) of Regulation D (a regulatory safe harbor for private offerings of securities promulgated under the Securities Act of 1933) if it takes reasonable steps to verify that any actual purchaser of the securities is an “accredited investor” prior to completing the sale of the securities to that investor.  It is worth noting that the securities offered in private offerings conducted pursuant to new Rule 506(c) may be sold solely to accredited investors, and issuers of such securities will be subject to certain enhanced notice filing and disclosure requirements when general solicitation and advertising is employed. 

To qualify as an accredited investor you generally need to have income of over $200,000 ($300,000 for joint filers) for the two most recent years, plus a reasonable expectation of the same in the current year, or a net worth of $1,000,000 (excluding your primary residence).  Prior to the passage of the JOBS Act (and the implementation of the regulations promulgated thereunder), most private issuers relied on an investor’s self-certification of his/her accredited investor status through the use of investor questionnaires and/or investor representations and warranties in subscription agreements.

However, under Section 201(a) of the JOBS Act, the SEC has given guidance as to new, non-exclusive methods for verifying a prospective investor’s accredited status.  Each of these methods will be deemed by the SEC to have satisfied the “reasonable steps” requirement (for accredited investor verification) imposed by Section 201(a) for Rule 506(c) offerings.  The verification methods are as follows:

  1. Natural Person Income Test: (a) review of any forms filed with the IRS to report the individual’s income, including a W-2, 1099, K-1 or 1040, for the preceding two years, plus (b) a written representation from the individual (and spouse, if applicable) that he/she reasonably expects to reach the income threshold for the current year.
  2. Natural Person Net Worth Test: (a) review of documents no more than three months old that verifies the individual’s assets, including bank statements, brokerage statements and other statements of securities holdings, CDs, tax assessments and independent third-party appraisal reports, plus (b) for liabilities, a credit report from at least one national credit agency, plus (c) a written representation from the investor that all liabilities have been disclosed.
  3. Third-Party Verification Method: receive written certification from a registered broker-dealer, and SEC-registered investment adviser, a licensed attorney or a CPA that the third-party professional has, after taking reasonable steps, determined in the last three months that the investor is an accredited investor.
  4. Grandfathering: if a natural person invested in an issuer’s Rule 506(b) offering prior to July 10, 2013, as long as they remain an investor, written confirmation of accredited investor status at the time the investor acquires the newly-offered securities will suffice.

Title III - Crowdfunding

Section 302(c) of the JOBS Act required that the SEC issue final rules governing Crowdfunding activities no later than 270 days after the date of the JOBS Act’s enactment, or by December 31, 2012.  The SEC failed to meet the deadline imposed by Section 302(c), and to date the SEC has not issued final rules governing Crowdfunding beyond the general Crowdfunding guidelines set forth in Section 302 of the JOBS Act itself.  These general guidelines include the following:

  • Privately-held companies are allowed to use government-registered Internet “funding portals” to raise capital from investors, including unaccredited investors.
  • There is a yearly aggregate limit on the amount an investor may invest in Crowdfunding offerings, which limit is tied to the investor’s net worth or annual income (e.g., (i) $2,000 or 5% (whichever is greater) for an investor earning (or worth) up to $100,000; and (ii) $100,000 or 10% (whichever is less) for an investor earning (or worth) $100,000 or more).
  • The amount of capital a company can raise annually under the Crowdfunding exemption is limited to $1,000,000; also, a company looking to raise between $100,000 and $500,000 must provide reviewed financials (and audited financials for capital raises in excess of $500,000).

Even with limitations on the amount an individual investor may invest in a Crowdfunding offering, we anticipate that the new Crowdfunding exemption will be used by startups and growth-stage companies with greater frequency than the new 506(c) offerings because of the ability to attract investments from unaccredited investors.  In fact, we note that a limited number of Crowdfunding portals have already emerged despite the lack of final regulations from the SEC.  We suspect that these early pioneers in the Crowdfunding space will ultimately force the SEC’s hand in adopting final regulations.  However, until that happens we only know the limitations and guidelines set forth in Section 302 of the JOBS Act (some of the key limitations and guidelines are summarized above).  But given the anticipated popularity of Crowdfunding for startups and growth-stage companies, we will continue to closely monitor the SEC’s Section 302-rulemaking activities and provide our clients with updates regarding same.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Partridge Snow & Hahn LLP | Attorney Advertising

Written by:

Partridge Snow & Hahn LLP
Contact
more
less

Partridge Snow & Hahn LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.