One year ago, on April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act into law during a Rose Garden ceremony. I remember that day very clearly because Barry Silbert, our CEO, and Mark Murphy, our Head of Public Affairs, were in attendance as recognition for SecondMarket’s efforts with respect to the 12(g) registration threshold and I was super jealous that I didn’t get invited too. During that event, President Obama made the following remarks:
“Here’s what’s going to happen because of this bill. For business owners who want to take their companies to the next level, this bill will make it easier for you to go public. And that’s a big deal because going public is a major step towards expanding and hiring more workers. It’s a big deal for investors as well, because public companies operate with greater oversight and greater transparency.
And for start-ups and small businesses, this bill is a potential game changer. Right now, you can only turn to a limited group of investors — including banks and wealthy individuals — to get funding. Laws that are nearly eight decades old make it impossible for others to invest. But a lot has changed in 80 years, and it’s time our laws did as well. Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors — namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
Presidential and broad bipartisan Congressional support, job creation, facilitation of capital raising under the watchful eye of the SEC - it sounded like a legislative slam dunk, didn’t it? So why is it that a year later, only those portions of the JOBS Act that were immediately effective are in place?
For today, let’s focus on Title II of the JOBS Act, which eliminated a decades-old ban on general solicitation in the context of private placements under Rule 506 of Regulation D, and save the crowd funding and Reg A provisions of the JOBS Act for another post, shall we?
So why the delay on Title II? The idea of eliminating the general solicitation prohibition in the context of private placements was far from novel. A wide variety of market experts from the American Bar Association to the SEC’s Advisory Committee on Smaller Public Companies to the participants on the SEC’s annual Forum on Small Business Capital Formation had been supporting relaxation of the ban in one form or another since the late 1990s. The SEC itself proposed a similar change for private offerings of “large accredited investors” back in 2007, amendments that were ultimately not approved, and various members of the SEC’s staff have been stating publicly for years that the Commission understood the need to revisit the prohibition in light of technological changes around communications
The problem for President Obama, Congress and issuers waiting for the ability to more easily locate accredited investors in order to raise badly needed capital is that the actual language of the JOBS Act made the elimination of the ban on general solicitation contingent upon SEC rulemaking, as follows (I added the bold):
Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules issued in section 230.506 of title 17, Code of Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors. Such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.
Based on the clear language of the JOBS Act, these rules should have been in place by early July 2012, at the latest. Instead, a year later, the SEC is still considering comments that were submitted on rules that were not even proposed until August 29, 2012. Checking the SEC’s website today, I was surprised to see that comment letters are still being submitted on these rules, even though the comment deadline was October 5, 2012, but was not surprised that the majority of these letters ask the SEC to take action to implement the proposed rules.
So what is the SEC waiting for? You would think that six months is long enough to distill the public comment letters, however numerous, received on the proposed rules. I’d also note that any number of Congressional members have written letters to the Commission urging it to adopt the proposed rules, and that the House Committee on Oversight and Government Reform even launched an investigation to see why the SEC issued proposed rules versus interim rules that would have had immediate effect. You should read the letter that Congressman McHenry sent to Chairwoman Mary Shapiro following that investigation and related hearings; it provides some real insight into the Commission’s inner workings.
During her testimony before the Senate Banking Committee last month, Mary Jo White, expected to be confirmed shortly as the next Chairwoman of the Commission, testified that she will work with the staff and Commissioners to “finish, in as timely and smart a way as possible, the rulemaking mandates contained in the Dodd-Frank Act and the JOBS Act.” I don’t envy her task with the pending departures of Commissioners Elisse Walter and Troy Paredes, but I hope, for the sake of the private issuers waiting for the ability to raise capital under these long overdue provisions, that I am not writing about this same topic a year from now.
- Annemarie Tierney