SEC Seeks Comments on First Set of Proposed Rules Under JOBS Act

Washington, DC – The Securities and Exchange Commission today proposed rules that will permit advertising of certain securities to accredited investors under the Jumpstart Our Business Startups Act (JOBS Act). The SEC seeks public comment about the rules within the next thirty (30) days.

The President signed the JOBS Act into law on April 5 2012. The JOBS Act changes federal securities — among other things — to permit small businesses to raise up to $ 1 million a year from small investors through online, crowdfunding portals, and also to permit the use of general advertising to solicit certain investments from accredited investors. The Act requires the SEC to formulate rules that will govern the changes.

One of the Act’s first deadlines included rules to allow businesses to use general solicitation — such as advertising — to offer certain securities to accredited investors under Secti0n 506, Regulation D.  This task included a requirement that issuers take reasonable steps to verify that the investor is accredited under law and regulations. Today, the SEC offered the following proposal during a public meeting in Washington.

Under the proposed rules, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that:

1.  The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.

2.  All purchasers of securities are accredited investors, because either:

  • They come within one of the categories of persons who are accredited investors under existing Rule 501.
  • The issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.Under Rule 501, a natural person qualifies as an accredited investor if he or she has individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase,excluding the value of the primary residence of such person.
  • Or, if he or she has income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

3.  In determining the reasonableness of the steps that an issuer has taken to verify that a purchaser is an accredited investor, the proposing release explains that issuers are to consider the facts and circumstances of the transaction. This includes, among other things, the following factors:

  • The type of purchaser and the type of accredited investor that the purchaser claims to be.
  • The amount and type of information that the issuer has about the purchaser.
  • The nature of the offering, meaning (a) The manner in which the purchaser was solicited to participate in the offering and/or (b) The terms of the offering, such as a minimum investment amount.

The SEC avoided proposing any specific verification method that an issuer must take, finding that it “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor . . . We are also concerned that a prescriptive rule that specifies required verification methods could be overly burdensome in some cases, by requiring issuers to follow the same steps, regardless of their particular circumstances, and ineffective in others, by requiring steps that, in the particular circumstances,would not actually verify accredited investor status.”

SEC Chair Mary Schapiro said in a opening statement that changes in technology and thresholds for investments regulated under securities law and regulations under the JOBS Act requires the SEC to study the changes, analyze the impact on investors, issuers and the markets, and take up any needed reforms. “While I’m prepared to bring forward today’s narrow proposal, I look forward to the continued examination of this critically important market,” Ms. Schapiro added.

The SEC urged the public to provide comments to the rules within thirty (30) days. The JOBS Act further requires the SEC to propose rules by the end of 2012 that would govern crowdfund investing through portals and intermediaries.
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