Free Speech & the JOBS Act

Some four months ago, lawyers Jonathan Massey and Laurence Tribe filed a provocative petition with the US Supreme Court. The "petition" takes the form of a brief or memo, which identifies constitutional free speech and due process concerns raised by securities laws that ban general solicitation and general advertising.

Screen shot 2012-06-09 at 10.08.11 AMThe federal securities law ban on general solicitation and general advertising - at least the one pertaining to offerings made in reliance on Rule 506 of Regulation D - is going to be overturned, of course, thanks to the JOBS Act (the SEC has yet to write the implementing rules). So in that respect, you might presume that the Massey/Tribe brief is moot, in terms of its larger resonance beyond the given case it addresses.

But that's not so. The petition - or the argument of the brief itself, really - is timely, providing a different lens on the JOBS Act. A useful lens. You walk away from reading the brief, better recognizing the paternalism that the Senators who drafted the equity crowdfunding exemption just couldn't get past.

A case before a court usually involves a specific fact situation. Changes to the law, if any, wrought by a court decision will usually be wrought in the context of deciding a particular case among particular parties. That's the situation here, too. I don't mean to imply that there is anything about the case Massey and Tribe are briefing that asks the Court to address the JOBS Act.

At the same, the implications of their arguments are not lost on the brief writers and they do indeed see the given case as a vehicle ("This case presents an excellent vehicle for this Court to address the First Amendment as it extends to laws restricting speech surrounding the marketing and sales of financial products and services"). Massey and Tribe also think specific Justices will be interested in some technical jurisdictional issues presented.

Here's an excerpt from the brief that summarizes a key argument with resonance for the JOBS Act:

"This Court should . . . grant certiorari to review the audience-based discrimination inherent in the Massachusetts ban [on general solictation and general advertising] as applied to [the financial firm] Bulldog. There is no dispute that Bulldog is permitted to distribute the identical materials to accredited and financially sophisticated investors who certify themselves as such, or to investors with whom Bulldog has a prior relationship so that it is aware of their financial situation. Ironically, the only people to whom Bulldog is not permitted to supply the information are the very people who cannot act on it to buy securities . . ."

"Moreover, the state’s prohibition on speech discriminates according to the financial status of the audience. A selective 'rich readers only' rule is precisely the kind of paternalistic snobbery that this Court has repeatedly condemned in commercial speech cases . . . ."

As noted above, the JOBS Act seems to resolve this free speech problem at a federal level. As long as a startup or emerging or other company can otherwise meet the requirements of Rule 506, the "rich readers rule" would have been overturned, and the point of discrimination would occur at the purchase of the securities, not in the offering of them. (Again, this JOBS Act resolution is not yet implemented; the SEC needs to write the rules, and those rules are going to impose new requirements for "verification" of the accredited status of the purchasers, at least when general solicitation or general advertising has been used.)

But how does the dogged paternalism of the equity crowdfunding exemption in the JOBS Act look in this light?

ProspectusThe crowdfunding portion of the JOBS Act states that an isser relying on the equity crowdfunding exemption "shall . . . not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker." Contrast this with the provision in the original, McHenry equity crowdfunding bill, which had admonished issuers to make "available on the issuer's website a method of communication that permits the issuer and investors to communicate with one another."

McHenry wanted information about crowdfunded offering to be open to crowdsourcing. The Senate version of crowdfunding, the one that passed and is in the JOBS Act, wants a classic, top-down prospectus (it just so happens to be a prospectus on a website, with the interactivity made possible by the web de-activated).

To borrow a phrase Massey and Tribe use to describe the Massachusetts ban on general solicitation and general advertising, the centralization and control of information required by the equity crowdfunding exemption of the JOBS Act is an "anti-disclosure rule." It follows from a mindset that the law should "protect the weak, the uninformed, the unsuspecting, and the gullible from the exercise of their own volition" (quoting from an old Supreme Court case cited in the Massey/Tribe brief).

In the Bulldog case, a state court had found that "Bulldog's proposal to concentrate enforcement at the point of sale rather than at the offer stage increases the risk that enforcement will come too late to prevent the harm or permit monetary recovery." That may also be a fair summary of the Congressional rationale to take the crowdsourcing of information out of equity crowdfunding.

Accredited investors will suffer no such proactive "prevention of harm," of course. Angel investing will be fine - better than ever - thanks to the JOBS Act. (In addition the the lifting of the ban on general solictation and general adverstising, Title II of the JOBS Act also gives the angel community a new safe harbor for online and other activity.)

But democracy, free speech, the ability of the average American to participate in the economy with her dollars, those principles are not actually reflected in the crowdfunding exemption of the JOBS Act.

Thanks to David Fisher for alerting me to this blog post by Jenny Kassan, which discusses the case and links to the brief.

Photo of old prospectus: John Spooner / Flickr.


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