The JOBS Act has led the Securities and Exchange Commission (SEC) to implement rules that remove the ban on general solicitation under Rule 506 of Regulation D. However, in September 2013, Kansas Republican Senator Jerry Moran, and Virginia Democratic Senator Mark Warner, voiced their concerns in a comment letter to SEC Chair Mary Jo White. The Senators indicated that the proposed rules would be contrary to the intended purpose of the JOBS Act and could lead to less funding for the small businesses that create a much needed employment increase. The comment letter urged the Commission to keep in mind the bipartisan intent of Congress and laid out some alternative solutions to ensure a more straightforward approach to raising capital.
1) The first obstacle that the Senators noted is the requirement that investors provide private financial information to verify their accredited investor status. The intended purpose of the JOBS Act and could lead to less funding for the small businesses that create a much needed employment increase. The comment letter urged the Commission to keep in mind the bipartisan intent of Congress and laid out some alternative solutions to ensure a more straightforward approach to raising capital.
Such a requirement could lead investors to shy away from providing funding, thus potentially causing serious damage to American startups and our economy. The senators stated that both investors and the public would benefit by the addition of more methods as “reasonable steps to verify” accredited investor status.
Their proposed less-burdensome solution is to allow angel investors to self-attest that they are accredited investors under a construct which penalizes perjury.
2) Another concern of the Senators was the proposed rules in connection with Regulation D, Form D, and Rule 156 which threaten to slow down or stop the usage of solicitation offerings by startup entrepreneurs.
Rule 506(c) contains requirements and penalties with regard to advertising offerings, which the Senators anticipate could lead to interruptions in fundraising. For example, requiring issuers to file a Form D fifteen days before they begin advertising their offering could delay fundraising and add costs and regulatory burdens on small or new businesses. The Senators suggested that the Commission tie the Form D requirement to the term sheet for the offering.
3) Additionally, entrepreneurs are required to submit their advertising materials to the SEC on the same day they are used, along with a long set of standard disclosures.
Such requirements may increase costs and can prove difficult when using new technologies (such as Twitter). The Senators suggested the Commission create an abbreviated set of disclosures that recognizes challenges posed by character limit requirements, such as the 140 character cap on Twitter. It was also suggested that the Commission could also include standard disclosures on term sheets instead of requiring the advertisements altogether.
4) Lastly, while the proposed rules allow an issuer a one-time 30-day period to correct a missed deadline in filing reports or submitting materials, the penalty for the next missed deadline is a one-year ban from using Rule 506 for an offering. The Senators encouraged the Commission to consider alternatives that are more proportional to the severity of the infraction.
You can find the full comment letter here.
Do you believe the alleviation of such burdensome regulation would help your offering and investment fundraising? In your opinion, what other SEC regulations create undue hardships for small businesses and start-ups?