Liberalizing Solicitation: Proposed Rules for Reg D and 144A under the Jobs Act


By: Ramona Ortega

On August 29, 2012, the US Securities and Exchange Commission released another round of proposed rules pursuant to Title II of the recently passed Jumpstart Our Business Startups Act (“Jobs Act”).  If adopted, the amended rules would significantly reduce prohibitions against general solicitation and general advertisement found in Regulation D under Rule 506 and Rule 144A.

President Obama signed the Jumpstart Our Business Startups Act in April of 2012, in an attempt to stimulate job creation by making it easier to raise capital for small businesses and startups. The Jobs Act focuses on web-based platforms such as crowdfunding, which alleviates many of the regulatory barriers for non-accredited investors to participate in the funding rounds.  The Jobs Act was intended to assist “emerging growth companies,” or companies with revenue of less than $ 1 billion.

The Jobs Act takes a trickle down approach to job creation.  By significantly reducing accounting and disclosure requirements related to Initial Public Offerings and non-public investment opportunities, the Obama administration is hoping to increase the number of job producing emerging growth companies.

The Jobs Act generally liberalizes the rules related to communications with investors prior to registration and reduces the immediate burden of Sarbanes-Oxley and Dodd-Frank on emerging companies in order to reduce the costs associated with registration.

The proposed rules are a shift away from the generally stringent registration requirements of the Securities Act of 1933 (the “Securities Act”), which requires registration of all securities offerings in the United States unless conducted pursuant to a specific exemption.  The proposed rules tweak already existing exemptions, or safe harbors, for private offerings under Section 4(2) of the Securities Act (“Reg D”) and Rule 144A, the resale of restricted securities to Qualified Institutional Investors (“QIB’s”).

For example, issuers relying on proposed rule 506(c) will be authorized to make general solicitations provided that ultimately all purchasers are Accredited Investors (“AI”) and reasonable steps are taken to verify that purchasers of the securities meet the requirements.

The Commission declined to define the “reasonable steps” prong of the proposed rule but did suggest that determinations would be fact specific and that issuers should retain records of the steps taken to verify a purchaser’s status as an AI.  An issuer does not lose the Rule 506(c) exemption if ultimately the purchaser fails to meet the AI criteria as long as reasonable steps were taken to verify their status and the issuer had a reasonable belief that the purchaser was an AI. Rule 506(b) and Regulations S, for sales of securities outside the United States, are still available and unchanged by the Jobs Act.

Some of the key provisions of the Jobs Act include:

  • Increasing the threshold for mandatory Exchange Act registration and public reporting from 500 shareholders of record to 2,000 shareholders of record, or 500 shareholders of record who are not accredited investors, excluding employee participants in stock compensation plans and any exempt “crowdfunding” shareholders;
  • Increasing the maximum offering amount under Regulation A from $5 million to $50 million;
  • Eliminate the ban on general solicitation and advertising in Rule 506 private placements and Rule 144A offerings so long as all buyers are accredited investors; and
  • Authorize companies to raise up to $1 million annually through “crowdfunding” offerings.

While some of the provisions are clearly beneficial to start-ups and will most likely increase activity in the private fund space, the reduced transparency that comes with the crowdfunding provisions have led some to suggest that the bill will lead to more fraud.  Former New York governor Eliot Spitzer told the New York Times, “It shouldn’t be called the JOBS Act, it should be called the Bring Fraud Back to Wall Street Act.”  The potential for a wide range of companies, including reverse merger shell companies, to utilize crowdfunding has market analysts warning small investors.  The ease by which an investor can go online and make an investment in an emerging growth company puts the onus on individual investors to ensure the safety of their investment rather than being able to rely on regulatory bodies.

The broad reach of the Jobs Act and the fragile state of our economy makes it an important piece of legislation that should be closely watched as it begins to be implemented.

The proposed rules will be open for comment for 30 days following publication in the Federal Register.


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Fordham Journal of Corporate & Financial Law