PLI’s Annual Securities Regulation Institute is officially underway here at the New York Hilton! The first full panel of the morning is entitled Jumpstarting Capital Formation - the New Legislation and Other Developments. The panel features Morrison & Foerster’s David Lynn, Shearman & Sterling’s Abigail Arms, Sullivan & Cromwell’s David Harms, Lona Nallengara of the SEC and Jeffrey Rubin of Hogan Lovells. Here are the highlights:
- The JOBS Act was the culmination of a year-long bipartisan effort to address concerns about capital formation and unduly burdensome regulations.
- Lynn says love it or hate it, JOBS Act is becoming the law of the land.
Title II: General Solicitation & Advertising
- Title II which directs the SEC to eliminate the ban on general solicitation and advertising for certain offerings under Rule 506, is the biggest change. Lynn says implementation will be difficult. “Reasonable efforts” to verify accredited investor status may differ depending on the facts and circumstances.
- Harms says one of the big dividing issues will be what other knowledge an issuer needs to have of an investor. There is a big difference between an open website where investors merely have to claim to be accredited versus an issuer having extensive knowledge of the investor (account information, etc.).
- Arms says companies must still be careful but there will always be companies out there who disregard rules. There will be greater pressure on practitioners and SEC Staff.
- The panelists agree that proscribing a list of verification criteria is difficult because situations vary so much. Harms says a reasonableness standard would be more effective. Arms says a bright-line checklist just doesn’t work because one size does not fit all.
- Nallengara says once 506(c) is adopted, a team made up of members of different SEC divisions will examine what verification and solicitation methods are being used to see whether the practices that develop really limit activities to accredited investors.
Title III: Crowdfunding
- Crowdfunding is seeking funding (subject to a $1 million cap) from persons who invest relatively small amounts. The SEC must adopt rules to implement the crowdfunding exemption by the end of 2012.
- Nallengara says there is “incredible interest” in this area and groups who seek to be the intermediary in these transactions routinely seek meetings with the SEC. He says this is definitely developing into an industry of its own and they have been helpful to the SEC in informing them of practices in this area. The mission to protect investors is still central in their rule making considerations. He seems doubtful that a rule could be adopted by the end of 2012. He says comment letters addressing the cost of various options is extremely helpful to the SEC Staff.
- Arms says crowdfunding is a simple idea that is not so simple. There are many issues to be considered such as: what type of equity interest do investors get (common stock, etc.); what if companies don’t have a traditional corporate structure (executives, board of directors, etc.); would a round of crowdfunding complicate later rounds of fund raising?
- Rubin says many of these offerings could be too small to attract the interest of the private bar or the SEC, leaving investors out of luck if a company goes under.
Title IV: New Offering Exemption
- The JOBS Act established a new offering exemption similar to Regulation A. Under the exemption, an issuer would be able to offer and sell up to $50 million in securities without Securities Act registration.
- There is no deadline for this rulemaking and the SEC has no proposals yet.
- Lynn says Regulation A is currently not used very often and Nallengara says they have received very few pre-comments in this area.
- Nallengara says they are considering either leaving Regulation A as it is or using this as an opportunity to improve it.
- Rubin says there are state securities law implications with Reg A which further complicates matters. A “qualified purchaser” definition from the SEC would be helpful. He says with state law streamlining and more guidance from the SEC, this could become a powerful tool.
- Significant changes to offerings are expected with the Rule 506 amendments.
- The viability of the crowdfunding exemption will depend on implementation.
- The ability to stay private longer and raise capital through the JOBS Act changes could transform the emerging company financing landscape and the attractiveness of IPOs.
Next up: Update from the Division of Corporation Finance