Is SEC on Track to Make Fundraising Easier for Startups?

July 27, 2013

The Jumpstart Our Business Startups Act, or more simply known as the JOBS Act, was supposed to make it less complicated for entrepreneurs to raise capital by easing security regulations.

You might recall it passed on bipartisan support, and became law in April 2012.

But under the law, unless the U.S. Securities and Exchange Commission (SEC) reverses its philosophy, startups will find it even more challenging to raise capital, says Seattle attorney Joe Wallin.

He’s a partner in the Seattle office of Davis Wright Tremaine.

Mr. Wallin agrees the JOBS Act treats accredited investors favorably in the offerings with the law’s repeal of the ban on general solicitation.

However, he points out startups will find it too arduous to raise funds, if the SEC adopts its proposed rules. The rules would amend Regulation D and Form D for entrepreneurs.

“The proposed rules are deeply flawed in that they will substantially increase the cost and complexity for startups trying to raise money,” writes attorney Wallin in his Startup Law Blog.

In what way are they flawed?

“The proposed rules make it harder for companies to conduct both non-solicited and generally solicited offerings,” Mr. Wallin explains.

A caveat requires startups to take a tortuous route — to determine and confirm that securities’ purchasers are indeed accredited investors.

“Originally, Section 201(a) of the JOBS Act simply instructed the SEC to repeal the ban on general solicitation for all accredited offerings, and did nothing more,” he writes. “In a hearing in the House, there was discussion, and a decision to add one sentence.”

What is the additional sentence?

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.

“The SEC has now determined, in light of comments it received “and the magnitude of the change that the elimination of the prohibition against general solicitation represents to the Rule 506 market”, to re-legislate the deal,” Mr. Wallin asserts. “I am pretty sure Congress understood the magnitude of what it was doing and it added one sentence and one sentence only.”

He explains the proposed rules:

  1. Make myriad new Form D filings at different stages in an offering for all offerings.
  2. File in advance with the SEC all solicitation materials for generally solicited offerings.
  3. Prominently include lengthy legends in any written solicitation materials for generally solicited offerings (forget Tweeting, the legends are too long).
  4. Include substantially more information on Form D for all offerings.

“Most unfortunate of all of these items, the proposed rules impose a 1 year prohibition on using Rule 506 in your next offering if you miss a 15 day filing deadline and don’t cure it within 30 days – or if you do cure the miss, you then miss another deadline in the same offering,” Mr. Wallin warns.

He maintains the SEC is off track from the intent of the law, and is making its rules more onerous.

What’s his recommendation?

“The SEC should re-visit its entire premise behind issuing these new proposed rules. The proposed rules do not reflect the deal Congress made when it passed the JOBS Act,” he concludes.

What can you do about it? Contact your representatives in Congress and the SEC.

From the Coach’s Corner, Mr. Wallin has been a strong advocate for entrepreneurs:

How Seattle Attorneys Helped Startups Get a Reprieve from Financial ‘Reform’ – Analysis: The angel investment ecosystem for entrepreneurs and job creation return to business as usual.

How Sen. Dodd’s Financial Reform Almost Killed Financing of Startups – An attorney helps lead the fight against job-killing provisions in Sen. Dodd’s financial regulatory bill.

“Everything takes three times longer than it should. Especially the money part.”

-Hugh MacLeod

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry. 

Seattle business consultant Terry Corbell provides high-performance management services and strategies.