What parts of the JOBS Act are already effective, and which are on hold until rules are written?

To prepare for today's live and livestreamed Docracy event in Brooklyn, Legal Stuff Explained 2.4: Equity Crowdfunding, I've taken a shot at answering the first bulleted questions from the event's page on Eventbrite.

"What parts of the JOBS act are already effective, and which are on hold until the SEC rules are written?"

I'm going to limit my answer to the parts of the JOBS Act that impact seed and early-stage financing. (The JOBS Act also brought changes to the law for later stage companies looking either to (a) go public, or (b) stay private longer (not back-into having to go public by virtue of having too many shareholders).)

With regard to seed and early-stage financing, the JOBS Act brings, or promises, three changes:

  1. Online angel platforms and incubators get an express exemption from federal broker-dealer regulation (with some strings attached).
  2. It will be okay to tweet, promote and otherwise advertise deals restricted to accredited investors (angels).
  3. Non-accredited investors will be able to participate in small, unregistered offerings that are conducted through a broker-dealer or funding portal.

Of these three changes, only the first, the exemption from federal broker-dealer regulation to empower online angel platforms and incubators, is already effective. It was effective once the the President signed the JOBS Act in April of this year. (In fact, the relevant statutory language has already been added to the United States Code.) And angel platforms are already doing bold and exciting things in reliance on this change in the law. See, for example, AngelList Docs. (This CNET article is a terrific "dot connector," explaining how AngelList Docs was enabled by the JOBS Act.)

Waiting for the busThe other two changes, to allow for advertising in deals limited to angels, and to allow non-accredited investors to invest via broker-dealers or funding portals, are not yet effective. These provisions of the JOBS Act won't go into effect until the SEC writes and finalizes implementing rules.

The SEC has proposed rules to implement the change that would allow companies to tweet, promote and otherwise advertise deals that are limited to angels. The SEC has not yet proposed rules to implement the third change, to allow non-accredited investors to invest in small, unregistered offerings via broker-dealers or funding portals.

Bear with me for a paragraph, as I'm going to switch into slightly more technical but more precise nomenclature: the "release" in which the SEC proposed rules to implement tweeting, promoting and other advertising of angel deals speaks in terms of "lifting the ban on general solicitation," a ban which had been - and, in fact, under one variant of the rule proposed by the SEC, will remain - a central condition for reliance on Rule 506 (leave aside for the moment that that condition has often been "observed in the breach"). Congress did not simply mandate that the SEC write rules to lift the ban on advertising, however; instead, through the JOBS Act, it specified that companies using a Rule 506 for which the ban would be lifted would have to (a) sell only to accredited investors (under current Rule 506, up to 35 non-accredited investors can participate (because of additional disclosure requirements, most startups don't make use of this feature)) and (b) take "reasonable steps," using methods determined by the SEC, to "verify" the accredited status of the purchasers.

The SEC's proposed rules have been controversial, because the agency did not, in fact, propose definitive "methods" for accredited investor verification, but instead said that what constitutes "reasonable steps" toward verification will depend on the facts and circumstances. Excepting me, Doug Cornelius, Joe Wallin and the Sullivan & Cromwell law firm, virtually nobody likes how the SEC punted on the question. Everyone else - from state regulators openly hostile to advertising, to industry participants happy to see Rule 506 modernized - wants the SEC to specify "safe harbors," methods that would tell companies what to do, how to "verify" accredited investor status. So the jury is still out on these proposed rules; the SEC may step back and try again.

I hope you notice I haven't used the word "crowdfunding" to describe the third change promised by the JOBS Act. I've done that deliberately, in an attempt to underscore that Title III of the JOBS Act, which is ostensibly about equity crowdfunding, really isn't crowdfunding at all. It's instead a kind of federalized, slightly more liberal (but much more complex) version of a state limited offering registration. And, rather than experiment with the idea that information about crowdfunded offerings might be crowdsourced, Title III hearkens to the same disclosure paradigm that brings you the Facebook IPO prospectus - centralized, one-way disclosure.

Here's a provocative way of looking at it: there are portions of the JOBS Act that can be fairly characterized as amounting to equity crowdfunding, and they are the lifting of the ban on general solicitation and general advertising in Rule 506 offerings restricted to accredited purchasers, combined with the federal broker-dealer exemption for angel platforms and incubators. Angels get to crowdfund. Non-accredited investors? They still have donation-based (non-equity) crowdfunding, on established platforms like Kickstarter or on DIY platforms.

Photo: FabioVenni / Flickr.

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