JOBS Act Series by Brenda Lee Hamilton, Attorney
Hamilton & Associates Securities Lawyers
October 2, 2012
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), into law. The JOBS Act, which was passed with bipartisan support in both houses of Congress, is comprised of a number of smaller bills that reduce the regulatory burdens confronting emerging companies in private and public financings. The JOBS Act creates sweeping changes to the Securities Act of 1933, as amended (Securities Act), the Securities Exchange Act of 1934, as amended (Exchange Act), and other laws and regulations. The legal and compliance related to these new rules will likely impact all issuers who conduct securities offerings including those who go public direct and undertake direct public offerings and those who pursue reverse mergers with public shells.
The JOBS Act reduces the regulatory burdens for emerging companies raising capital inprivate placement offerings, particularly Rule 506 of Regulation D (“Rule 506”) of the Securities Act of 1933, as amended (the “Securities Act”).
To offer and sell securities in the United States, an issuer must comply with the registration requirements of the Securities Act, or must offer and sell the securities pursuant to an exemption from registration. As presently in effect, Rule 506 does not limit the amount of capital an issuer can raise, the number of accredited investors who may purchase, or the number of shares that an issuer may offer or sell. The primary limitation of Rule 506 is that the offering must be private.
An issuer cannot use general solicitation or advertising (such as publishing an advertisement in a newspaper or on TV, or announcement on a website or at a public seminar) to market the securities offered and must have a pre-existing relationship to any investor solicited. Further, any person who is involved in the selling efforts must be registered as a broker-dealer pursuant to Section 15(a)(1) of the Securities Exchange Act of 1934, as amended (“Exchange Act”).
The JOBS Act dramatically modifies Rule 506 including that it:
● requires the Securities and Exchange Commission (“SEC”) to amend Rule 506 within 90 days after enactment of the JOBS Act to remove the prohibition against general solicitation and general advertising in 506 offerings provided that all purchasers are “accredited investors”;
● requires the SEC to amend Rule 506 to require issuers relying on Rule 506 to take reasonable steps to verify that purchasers in 506 offerings are accredited investors using standards to be established by the SEC;
● amends Section 4 of the Securities Act to provide that offers and sales that are exempt from registration under Rule 506, “shall not be deemed public offerings” under the federal securities laws as a result of general solicitation or general advertising; and
● amends Section 4 of the Securities Act to provide that certain persons providing services in connection with offerings sold in compliance with Rule 506, shall not be required to be registered as broker-dealers pursuant to the Exchange Act.
Upon amendment of Rule 506, issuers will be permitted to engage in general solicitations, general advertisements or similar related activities, whether online, in person, by television or through any other means. Additionally, upon amendment of Rule 506, publicly traded companies may find that it is less cumbersome and more beneficial to conduct a Rule 506 offering than to file a registration statement with the SEC and work through the SEC review and comment process.
Although portions of the JOBS Act became effective immediately, rulemaking and guidance from the SEC is necessary to implement the changes to Rule 506 required by the JOBS Act. The SEC must issue implementing rules within 90 days of the JOBS Act’s enactment or by early-July 2012. The crowdfunding exemption was immediately effective upon enactment of the JOBS Act. However, various provisions require implementing rules to be issued by the SEC, which must occur by early-January 2013. The true effect of the JOBS Act on Rule 506 and crowdfunding will depend substantially on the SEC’s adoption of the required rules and regulations. Title III of the JOBS Act authorizes “crowdfunding,” permitting issuers to raise equity capital from both accredited and non-accredited investors without registration with the SEC. Crowdfunding is intended to allow issuers to solicit small investments directly from the general public through a “crowdfunding intermediary,” a broker or a funding portal registered with the SEC and any applicable self-regulatory organization.
The JOBS Act provides for the following with respect to crowdfunding offerings:
● the aggregate amount of securities sold within any 12-month period may not exceed $1 million;
● the aggregate amount of securities sold to any individual within a 12 month period may not exceed the greater of $2,000 or 5% of the annual income or net worth of such investor if either the annual income or the net worth of such investor is less than $100,000, and 10% of the annual income or net worth of such investor not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;
● sales must be made through a registered broker-dealer and securities intermediaries must provide disclosures to investors and the SEC and comply with other regulations to be adopted by the SEC; and
● companies must provide investors and the SEC with certain information about the company including financial statements, its officers, directors and shareholders, risks related to the offering and certain other information determined by rules adopted by the SEC based upon the proposed amount of capital to be raised.
Companies who go public direct or undertake underwritten or direct public offerings should be aware that the SEC has not implemented the new rules concerning Rule 506 and as such, the existing rules apply including the prohibition against general solicitation and advertising.
For further information about this article, please visit www.Securitieslawyer101.com or contact Hamilton & Associates at 561-416-8956 or by email at email@example.com. This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.