SEC finally gets around to JOBS Act solicitation rules

Not as good as I hoped nor as bad as I feared

The good news is that the SEC has FINALLY gotten around to proposing rules to implement the JOBS Act provisions relating to general solicitation in accredited-only offerings. See my last post: Is the JOBS Act evil? Or just misunderstood.   

The proposed amendment would provide that the prohibition against general solicitation and general advertising would not apply to offers and sales of securities made pursuant to Rule 506 of Reg D, provided that all purchasers of the securities are accredited investors. The proposed amendment would also require that the issuer take reasonable steps to verify that purchasers of the securities are accredited investors.

Better late than never - the Congressional mandate called for proposed rules in July. There are no real surprises here. The proposed rules follow the statute closely and address only the narrow issue of allowing solicitation in certain accredited only offerings. The drafting problem for the SEC was in establishing a standard of diligence for a company in order to decide that its investor is “accredited.” An “accredited investor” includes natural persons and entities that come within any of eight enumerated categories in the rule, or that the issuer reasonably believes come within one of those categories, at the time of the sale of securities.

The category that applies to most individuals is that their individual net worth, or joint net worth with that person’s spouse, exceeds $1 million, excluding the value of the person’s primary residence (the “net worth test”); or that they have income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and have a reasonable expectation of reaching the same income level in the current year (the “income test”).

Under current rules, the issuing company may be expected to have more information about an investor, since solicitation is not allowed and thus must have been in the company’s theoretical network. When issuers can advertise and reach investors who may have no prior relationship or contact with an issuer at all, the company may have to do a little bit more work determining that the investor is really accredited. The issuer must in that case take reasonable steps to verify the purchaser’s accredited investor status. This may require third party verification, something few issuers do currently. In other words, simply filling out a questionnaire may not be sufficient. It will be a facts and circumstances test, based on various factors, such as the amount of information the issuer has about the investor.

Some of us had hoped that the SEC would lower the bar and just let companies accept investor suitability questionnaires that were not obviously false, or at least set some objective safe harbors. The SEC did not
go that far, but even though the bar is higher for establishing accredited investor status in some cases, it is not prohibitively high, and it seems doubtful that the rules will significantly impede Congressional intent.

The Commission is soliciting comments on the proposed rules and, given the large amount of discussion of the JOBS Act in the startup community, we can expect a deluge of comments. Overall, this is a good day for the startup community.

Image source: gaebler.com