McCarthy "General Solicitation" Bill Gets Overhaul on House Floor

Back in Seattle.

It looks like the crowdfunding component of the Jumpstart Our Business Startups (JOBS) Act, passed by the House this week, does not vary from the McHenry crowdfunding exemption bill previously passed by the House. This based on a scan last night of the March 7 Congressional Record. (But see paragraph below about information from Jim Hamilton's blog.)

McCarthy's bill to repeal the ban on general solicitation in Rule 506 offerings, however, was overhauled by an amendment on the House floor. And that amendment appears to have been approved by voice vote.

Here's a reconstruction of what I think is now the operative section in the JOBS Act, repealing the ban on general solicitation or general advertising where all purchasers in a Rule 506 offering are accredited investors:

Screen shot 2012-03-09 at 5.31.37 AM

To double check me on this, reference the "Rules Committee Print 112-17," which has numbering that helps find the precise lines, and look at the third column of page H1260 of the Congressional Record for March 7, 2012.

According to the Congressional Record, here is what Rep. McCarthy said on the House floor about the amendment of his bill:

"This amendment does three things: Clarifies that general advertising provision should only apply to Regulation D, rule 506 of the securities offerings; Protects investors by allowing for general advertising in the secondary sale of these securities, so long as only qualified institutional buyers purchase the securities; Provides consistency in the interpretation for regulators that general advertising should not cause these private offerings to be considered public offerings."

Jim Hamilton's blog has a rundown on how the JOBS Act would change securities laws. The scope is broader than the two components we talk a lot about here on this blog, which are crowdfunding and general solicitation. Other components, like the IPO on-ramp and a possibly re-vitalized Reg A (okay, we did have one post on that latter topic), I am not covering. Jim's post is ambitious, timely, and a much more comprehensive survey of the scope of captial formation reforms in the JOBS Act.

Jim's blog also has this interesting information about an amendment offered by Rep. McHenry, he of the crowdfunding exemption bill:

"The House approved a floor amendment offered by Rep. Patrick McHenry (R-NC) that would, for Rule 506 of Regulation D, provide an exemption from registration as a broker or dealer for trading platforms that do not charge a fee in connection with the purchase or sale of the security or permit general solicitations, general advertisements, or similar or related activities by issuers of such securities. The McHenry Amendment is designed to enable the marketing of private shares to accredited investors through platforms."

I could not find this offered amendment in the Congressional Record. But this is big news, and sounds like a reform that may help facilitate the grown trend of angel groups to syndicate (as briefly noted in yesterday's post).

Two closing thoughts, both possibly for further development:

  • McCarthy's general solicitation bill, as now amended, and McHenry's crowdfunding exemption, now passed twice by the House, are yet inconsistent, insofar as they don't really reconcile the issues raised by accredited investors investing under Rule 506 at the same time that startups raise funds under the crowdfunding exemption. These open questions are identified in my GeekWire guest post of last week.
  • The Senate is supposedly going to put together its own package, possibly next week. I expect that the baseline crowdfunding component of the Senate version will be the Merkley bill, which is too bad. But that's politics. The Senate would do better to start with the Brown bill, but Brown is a Republican up for reelection.

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