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JOBS Act, Crowdfunding, Legislation

A few parts of Dodd-Frank make some changes or at least propose new rulemaking regarding some areas dealing with Regulation D.  Regulation D is commonly used by small and new companies as an exemption from having to register their securities (e.g. common stock, preferred stock, debt instruments) with the SEC, which can be costly and time-consuming.  In addition to the change in the “accredited investor” definition (See Changes) which can affect how Reg D is applied in fund raising or who you can have as an investor, here are a few other changes and their implementation:

Reg D Bad Actors Exemption

Section 926 of Dodd-Frank tells the SEC to implement new rules by 1 year from enactment (July 2012) that disallows the following people two classes of people from offering or selling securities under a Regulation D exemption:

A)  Anyone who is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that—
(i) bars the person from—(I) association with an entity regulated by such commission, authority, agency, or officer; (II) engaging in the business of securities, insurance, or banking; or (III) engaging in savings association or credit union activities; or
(ii) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale; or

B)  Anyone who has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission (SEC).

This means that companies will need to carefully examine whether any offering or sale they do would subject them to this requirement.  The specifics on how this will be applied has not been disclosed by the SEC yet, but the main concern for businesses will be who in their organization will be subject to this.  Will they need to run background checks on upper management or anyone involved in fund raising or a securities offering?


The President will sign into law the JOBS Act (HR 3606) which includes prior bills relating to Reg D offering expansions allowing general solicitation,  allow crowdfunding to raise money, and several other provisions to assist small businesses. (See Full Text of Bill)

I particularly like the statement by Columbia Law Professor John Coffee, Jr. when testifying about crowdfunding in front of the SEC, “every barroom in America might come to be populated by a character, looking something like Danny DeVito, obnoxiously trying to sell securities to his fellow patrons. He could provide each fellow patron with a business card that noted that the securities carried high risk, but would need to provide no other disclosure.”

JOBS Act Update:

Portions of HR 2930 and other similar bills were incorporated into HR 3606, the so-called JOBS Act (Jumpstart Our Business Startups).  This bill then went to the president March 27, 2012 and was signed into law on April 5, 2012.  The SEC still needs to implement rules, so there will not be much impact of the simple signing of the Act.  It gives the legal authority for the SEC to implement these changes over various time frames from 90 days to 270 days.

The best way to know exactly what this bill says is to read it, despite the somewhat dense language and references to other parts of U.S. law.  Here is a link to the actual PDF format of H.R. 3606.  For an overview and summary of this bill and its history you can read here.  These are links directly to the information provided by Congress.  Some of the confusion has been that the legislative process involves a very confusing system where bills are introduced, amended, and sometimes added to existing bills.  That was the case with the JOBS Act and the crowdfunding provisions.  H.R. 2930 was the original crowdfunding bill that passed the U.S. House and went to the Senate, but did not actually pass the Senate.  After adding and deleting portions from various amended versions similar to H.R. 2930, the crowdfunding and other provisions were all put into one bill called H.R. 3606.  This passed the Senate and then went back to the U.S. House after amendments to be passed.  It has passed and was forwarded to the President for signature on March 27, 2012.  He is expected to sign it this week.

Title I of the bill implements reduced reporting and other limited disclosure requirements for emerging growth companies (those with under $1 billion in gross annual revenue and haven’t hit the other limitations to take them out of this classification). It also sets out changes to Regulation S-K and actions to be taken by the SEC within 180 days to ease the burden on these small to middle market companies to register or comply with SEC rules.

Title II provides the ability to use general advertising and solicitation by companies of investors if they are relying upon a Reg D Rule 506 exemption for that issuance of securities, but all investors must be accredited.  Rule 506 previously allowed large private fundraising by companies, but the investor would need to meet the definition of accredited investor or what is referred to as a sophisticated investor if they were not accredited (See recent amendment to Accredited Investor definition).  Now, the company can still raise money through non-accredited sophisticated investors; however, if they do this, they cannot use general advertising or solicitation.

Title III discusses crowdfunding, defines it, and places certain requirements on the issuer (company issuing the security in exchange for funding) and any intermediary used to assist in the fund raising process, also called a “funding portal.”  Also of note, the funding portal has requirements regarding registering with the SEC and they cannot compensate a so-called finder for bring the investors to the funding portal.  Many people refer to the example of Kickstarter, but with the change that now the website would sell stock instead of a “pledge” or gift to large numbers of investors with small investments each.

Title IV amends Section 3(b) of the Securities Act of 1933 (also discussed in SEC Regulation A) to provide a different amount for certain  exempt offerings of securities.  It previously said the aggregate of such offering could go to $5 million and now is amended to go up to $50 million.  They may be sold publicly and interest can be solicited prior to filing an offering statement.  Now the SEC is given authority to implement new rules to protect investors and companies must follow certain guidelines and procedures, so we will have to wait to see exactly what these new exemptions may mean for issuers.

Title V provides an amendment for the test to determine when a company crosses the line to be required to comply with reporting obligations with the SEC.  Previously, once the company hit 500 shareholders and assets over $10 million, they had to start complying.  Now that threshold is increased to either when the company hits 2,000 shareholders or 500 un-accredited shareholders.  It exempts from the calculation employees who received stock pursuant to an employee compensation plan.  Title VI also discusses amendments related to this same topic.

Title VII is a somewhat vague brief provision that simply tells the SEC to provide an online forum for information and discussion related to small and medium business and certain other classes of businesses.

With all the fervor around crowdfunding, I wanted to be sure people had the actual bill to read so they didn’t start giving incorrect information.  You may also see other references to H.R.572, S.1933, S.1970, S.2190, H.R. 2940 which were related bills and ended up being incorporated in some form into HR 3606.

The term funding portal will start to be heard much more as it will be used by intermediaries to help raise money and the newly proposed definition is:

(b) DEFINITION.—Section 3(a) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the
‘‘(80) FUNDING PORTAL.—The term ‘funding portal’ means
any person acting as an intermediary in a transaction involving
the offer or sale of securities for the account of others, solely
pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C.
77d(6)), that does not—

‘‘(A) offer investment advice or recommendations;

‘‘(B) solicit purchases, sales, or offers to buy the securities
offered or displayed on its website or portal;

‘‘(C) compensate employees, agents, or other persons
for such solicitation or based on the sale of securities displayed
or referenced on its website or portal;

‘‘(D) hold, manage, possess, or otherwise handle
investor funds or securities; or

‘‘(E) engage in such other activities as the Commission,
by rule, determines appropriate.’’.

The SEC has 270 days to institute rules to implement crowdfunding and registration of funding portals, so as of now, there is no way for a funding portal to actually register to comply with the new law.

Updates will be provided as they become available.  Generally the SEC proposed rules, asks for comments, and then implements final versions.

Related Blog Posts:

Intermediaries, Rule 506 changes, & Crowdfunding- HR 2930 & 2940

Kickstarter and other Crowdfunding sites to grow

Legal Disclaimer: All answers and discussions in this article are meant to be general and educational in nature only and should not be relied upon as legal, business, or tax advice for your specific situation.  Most discussions refer to laws and regulations as applied to a California corporation and these can vary by location, as can other factors in certain situations within California, so it is always best to consult with a licensed local attorney with experience in these matters.  Use of, or any discussion as a result of these articles does not create an attorney-client relationship and is not governed by rules on confidentiality.