Crowdfunding vs. general solicitation

There's something really wrongheaded about the proposed rules issued concurrently last week with the final rules lifting the ban on general solicitation.

If you have a crowdfunding orientation, you may well not pick up on this, at least to the extent that you have already made peace with the information requirements outlined in Title III of the JOBS Act.

Phpwsz38ucaptureIf you're thinking about Title III and waiting on what FINRA might say and when the SEC rules to implement non-accredited crowdfunding will be proposed, you might look at the proposed written communication pre-filing requirements for final Rule 506(c) and say, "so what's the big deal; shouldn't startups have to be disciplined and get all their communications organized, even filed in advance? You have to do so on Kickstarter and you'll have to do so on funding portals, as well."

But the theory behind lifting the ban on general solicitation in Rule 506 offerings where all purchasers are accredited was premised on the concept that accredited investors could fend for themselves. There is no specific information requirement for Rule 506(b) offerings, nor is there anything like a written communication filing requirement. There isn't any pre-filing requirement at all; instead, you have a closing or initial closing and file the Form D after the fact.

Yes, Congress expressed concern that, with the ban on general solicitation and advertising lifted, more people would know about angel deals, and might be tempted to bend the truth as to their accredited status, wanting "in."

But Congress mandated a change to address the concern: it told the SEC to come up with rules that would require issuers engaging in general solicitation to "verify" the accredited status of the purchasers in an advertised offering.

Congress did not tell the SEC to start tinkering with the communications used in offerings under Rule 506 that involve general solicitation. Did not tell the SEC to impose pre-communication filing requirements. Did not suggest that the SEC mandate legends. Did not suggest anything that is in the proposed rules to change Form D and Reg D.

And Congress might have! They did all such things in Title III.

That Congress chose to impose strict information requirements for non-accredited investment crowdfunding, but not on Rule 506(c) angel offerings, is more than telling. It's the key reason to think last Wednesday's proposed rules are grossly misguided.


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