JOBS Act

Private Offering Reform: Analysis and Implications

By Davis Polk & Wardwell LLP | Posted on

[Editor’s Note: The following update is authored by Davis Polk & Wardwell LLP]

On July 10, 2013, the SEC adopted amendments to the Regulation D and Rule 144A private-placement safe harbors, as mandated by the JOBS Act of 2012. The amendments, which will become effective on September 23, 2013, will eliminate the prohibition on widespread advertising and other forms of “general solicitation” or “general advertising” in private offerings under Rule 506 of Regulation D of the Securities Act of 1933 or under Rule 144A of the Securities Act of 1933, so long as all purchasers of the securities are reasonably believed to be accredited investors upon taking reasonable steps to verify as much (under Rule 506) or are reasonably believed to be qualified institutional buyers or “QIBs” (under Rule 144A). The amendments, however, did not extend the ability to engage in general solicitation to private placements that are not conducted in reliance on Rule 506 or Rule 144A, such as Section 4(a)(2) of the Securities Act of 1933. (more…)

SEC Eliminates the Ban on General Solicitation, and Disqualifies Participation by “Bad Actors,” in Certain Private Securities Offerings

By Arnold & Porter LLP | Posted on

[Editor’s Note: The following post is authored by Arnold & Porter LLP]

On July 10, 2013, the Securities and Exchange Commission (SEC) adopted final rules (Final Rules) eliminating the ban on general solicitation and general advertising for private securities offerings under Rule 506 of Regulation D under the Securities Act (Regulation D) and Rule 144A under the Securities Act (Rule 144A). The Final Rules also make Rule 506 unavailable for offerings if the issuer or any related “covered person” is a “bad actor” (i.e., has engaged in a “disqualifying event”). The adoption of these rules by the SEC was required under Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act) and Section 926 of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), respectively. The Final Rules will go into effect 60 days after publication in the Federal Register. (more…)

SEC Adopts JOBS Act Rules Allowing Public Marketing of Private Fund Securities

By Kirkland & Ellis LLP | Posted on

[Editor’s Note: The following post is authored by Kirkland & Ellis LLP]

As discussed in previous PENs, the SEC’s rules governing the sale of unregistered securities by a private “issuer” — including a private fund and a “newco” formed to purchase or invest in a target — have for many years prohibited the issuer from engaging in general solicitation of or general advertising for investors. (more…)

General Solicitation and Other Changes to Regulation D: The Impact on Private Funds

By Ropes & Gray LLP | Posted on

[Editor’s Note: The following update is authored by Ropes & Gray LLP]

On July 10, 2013, the Securities and Exchange Commission adopted an amendment to Rule 506 of Regulation D, promulgated under Section 4(a)(2) (previously Section 4(2)) of the Securities Act of 1933, to allow issuers to engage in “general solicitation” and “general advertising” in certain offerings made under Rule 506, so long as all purchasers of the securities in such offerings are accredited investors and certain other conditions are met (the “General Solicitation Amendment”). Congress directed the SEC to adopt the General Solicitation Amendment last year as part of the JOBS act. In a separate release, the SEC also adopted amendments to Rule 506 to disqualify issuers and other market participants from relying on Rule 506 if “felons” and other “bad actors” participate in the Rule 506 offering (the “Bad Actor Amendment”). The General Solicitation Amendment and the Bad Actor Amendment will go into effect 60 days from publication in the Federal Register, which is expected within the next few days. The SEC has also proposed new rules intended to enhance the SEC’s ability to evaluate and monitor the development of market practices in Rule 506 offerings and address concerns that may arise in connection with allowing issuers to engage in general solicitation and advertising under Rule 506. (more…)

FTO Analysis Necessary for Crowdfunding

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Financing through crowdfunding is an attractive way for startups and small businesses to raise capital by receiving small amounts from a large number of investors.  The method will only increase in popularity after the SEC finalizes the provisions for equity-based crowdfunding.  There are, however, potential IP problems inherent in crowdfunding.  In order to attract investors, companies have to publicly disclose detailed information about their business.  Competitors can then use this information to find IP violations and sue the budding business.  In order to prevent or prepare for this situation, companies using crowdfunding should conduct a thorough freedom to operate (FTO) analysis. (more…)

Professor Robert Bartlett speaks on the JOBS Act at Orrick, Herrington & Sutcliffe LLP.

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

Within a month of the Initial Public Offering (“IPO”) Task Force’s white paper, “Rebuilding the IPO On-Ramp,” Congress developed the Jumpstart Our Business Startups (“JOBS”) Act.  The legislation aims to create new companies, and ultimately new jobs.  The JOBS Act loosens security regulations, making it easier for startups to access funding and go public.  Professor Robert Bartlett recently spoke about the effects of the JOBS Act at a Berkeley Law Alumni Center event held at Orrick, Herrington & Sutcliffe LLP.

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JOBS Act Symposium: Liveblog Recap & Review

By Valerie Jon Ramos, J.D. Candidate 2015 | Posted on

This post will detail the two panels from last Friday’s 2013 BCLBE and BBLJ JOBS Act Symposium:  1)  The IPO On-Ramp and 2) Crowdfunding.

Panel 1:        The IPO On-Ramp

Moderator:  Ian Peck

Robert Bartlett, Professor, UC Berkeley, School of Law

Reza Dibadj, Visiting Professor, UC Berkeley, School of Law

Martin Zwilling, Startup Professionals 

Background: Title I of the JOBS Act

Title I of the JOBS Act was originally pitched as a job creation vehicle.  Title I seeks to accomplishes this through its two provisions: (1) providing an “on-ramp” to going public for emerging growth companies (“EGCs”), a company within five years of going public, using existing principles of scaled down regulation; and (2) improving the availability and flow of information for investors before and after an IPO.

There are four­ major changes that were discussed during the panel:

1)    Creation of the “Emerging Growth Company” as a new category of issuer

2)    EGCs eligible for IPO On-Ramp enjoy significant benefits, including:

  • A reduced two-year requirement of audited financials needed in registration statements versus the standard three to five years
  • Allows communication between EGCs and qualified institutional buyers prior to filing registration statement (although there is an SEC Rule that does not allow solicitation of filing)
  • Research reports can be filed even while the EGC is making an offer

3)    EGCs have less extensive financial reporting/audit obligations (exempt from SOX)

4)    EGCs have limited executive compensation disclosures 

Moderated Q&A

When questioned about what problems exist in the IPO market and how the JOBS Act approached these problems, there was a general consensus that the worry stemmed from the dramatic decline in IPOs in the market over the past decade. IPOs going overseas, problems that came with the economic downturn, and the choice of M&A as the preferred exit strategy.  Zwilling spoke beyond the general market on how entrepreneurs, in general, want control of their company, and when they are ready to exit, M&A serves as a better exit strategy due to its lower costs and fewer regulations.

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JOBS Act Symposium: Crowdfunding–Finance Democratization or Investor Protection?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The crowdfunding panelists discussed what Mary Dent referred to as a “fundamental tension” between the democratization of finance and protecting unsophisticated investors.  In traditional securities law, S.E.C. has protected Main Street consumers from especially risky investments, unless an investor can demonstrate they he or she is a sophisticated investor—using net worth, for example, as a proxy for sophistication.

Professor Bartlett agreed with the tension and added that they crowdfunding marketplace may suffer from the “bad apple” problem.  Even if a vast majority of crowdfunding investors or entrepreneurs have good intentions, a small number of ‘bad actors’ could easily shake confidence in the crowdfunding brand or marketplace. 

JOBS Act Symposium: Do the crowdfunding provisions make bigger problems than the ones they try to solve?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.

Eric Brooks sees investors defrauded everyday in his job with the SEC. As a result, the cynic in him says that the crowdfunding provisions do create greater problems than the solve. Fraud is even easier to perpetrate over the internet and the Act sanctions the funding portals. The SEC will likely face an increase in customer complaints from investors who lose money through crowdfunding investments which then have to be researched. Nevertheless, the Act and attendant regulations can work well if protections are preserved.

Robert Bartlett analogized crowdfunding to the ability to generally solicit investments up to a million dollars in the 90’s. That freedom led to significant instances of fraud. There is a definite potential for this act to be a repeat of those failures.

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JOBS Act Symposium: Crowdfunding

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.  [Note:  Mr. Brooks is with the S.E.C., but noted that his remarks are not official and do not represent the administration’s position.  His comments are his own.]

What is crowdfunding (“CF”) is trying to achieve?

Professor Dibadj began, noting that the CF movement is largely motivated by technology and the concept that individuals can pool money towards a common cause.  The idea had worked in other sectors (e.g. natural disaster relief or political campaigns), so some wanted to apply CF in the private sector.  The problem, pre-JOBS Act, was that capital transfers could be considered an unregistered investment or security, thus easily violating federal securities laws.  Martin Zwilling agreed that investors saw CF structures work in the non-profit space, so they asked, “Why couldn’t it work for for-profit companies?”

Mary Dent added that the CF movement was spurred by the perception (whether or not it is true) that small companies have recently been the biggest contributor to job growth.  However, many startups could not access funding from skeptical VCs or banks.  Congress wanted to encourage these small, growing companies so created the JOBS Act’s CF exemption to allow alternative funding networks.

Martin Zwilling cautioned that investors might be funding weak or under-developed companies.  VCs might argue that the market has not suffered from a lack of available funds, but a shortage of good investment opportunities.  Zwilling concluded, “I don’t think CF will solve [those companies’] problems if they’re not ready for the market yet.”

Professor Bartlett viewed the rise of CF as “the democratization of finance.”  Many CF platforms and groups press their case by framing it as a fairness issue, whereby small, less-sophisticated investors can participate in startup financing opportunities.  However, Mr. Brooks drew upon his experience as a securities regulator, noting that this very democratization creates serious concerns of fraud.