135 posts categorized "JOBS Act"

Early data on use of 506(c) (accredited crowdfunding)

Recent remarks by Keith Higgins, newly appointed Director of the SEC's Division of Corporate Finance, give us some early data on how issuers are making use of new Rule 506(c).

You'll recall that 506(c) is the rule that implements the lifting of the ban on general solicitation in offerings that otherwise meet the applicable Reg D requirements, and also limit purchasers to accredited investors who are subjected to a heightened verification standard. "Implements" refers to the Congressional mandate to do so, under the JOBS Act. (It's interesting to me that Higgins at least once in his written remarks refers to the Congressional mandate as "requiring the Commission to modify the prohibition against general solicitation," emphasis added.)

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In a footnote to his written remarks, footnote 18 on page 10, Higgins relays the following information from the SEC's Division of Economic Risk Analysis (DERA):

"Based on the information reported in the initial Form D filings reviewed by DERA, as of October 18, 2013, there have been 170 new offerings made in reliance on the new Rule 506 exemption that became effective on September 23, 2013, with approximately $911 million in total amount sold in these offerings. In addition, 44 offerings that commenced in 2013, but before the effective date of the new Rule 506 exemption, were subsequently converted to offerings relying on the new exemption. Since the new rules became effective, the average offering size for Rule 506(c) offerings was $6.1 million, as compared to $22.8 million for Rule 506(b) offerings; the median offering size for Rule 506(c) offerings was $1.3 million, as compared to $1.8 million for Rule 506(b) offerings.

What does this suggest? Well, that issuers (be they startups or hedgefunds, we can't really tell from this data) are using 506(c); and that generally solicited offerings may be targeting smaller amounts than traditional 506 deals.

You may be thinking, the modest number of filings - some 200 - seems too small. After all, weren't thousands of startups going "public" with their "private" offerings on AngelList within hours of 506(c) becoming effective on September 23?

Ah, but recall that the filing deadline is 15 days from first sale. So there should be a healthy lag, at least as long as the current filing requirements remain in place (recall that proposed rules are out, imposing pre-filing requirements for 506(c) deals and lots of other not-so-fun changes for both 506(c) and 506(b)).

Thanks to articles by Broc Romanek and Sarah Lynch for identifying Higgins' testimony.

Working Summary of the Proposed Crowdfunding Rules by Kevin Laws

So here is an early holiday present: AngelList COO Kevin Laws's working, in-process summary of the Title III crowdfunding rules proposed yesterday by the SEC.

Capture113Keep in mind that these rules were first posted some 24 hours ago. Kevin is the last person to think the summary he prepared yesterday will prove definitive. But I personally think his effort is amazing, condensing things at just the right level.

Rather than cut and past Kevin's working summary into the body of this post, the link above is to a Google doc that Kevin is updating as he receives feedback.

Kevin's summary will prove hugely useful to crowdfunding advocates, players in the nascent non-accredited crowdfunding industry, and others just interested in the startup financing ecosystem and trying to figure out how viable this new alternative may prove to be.

Please do also feel free to add comments in the comment thread to this post.

Respect for the crowd in the proposed crowdfunding rules

A huge, immediate surprise in the Title III crowdfunding rules proposed yesterday by the SEC: the Commission proposes to enable discussion of a Title III offering with and among the crowd.

Permitting the crowd to talk to the issuer, and enabling the crowd to talk amongst themselves about a given deal, was an express feature of the original, popular McHenry crowdfunding bill, which passed the House overwhelmingly in 2011 and had the support of the White House.

6306573376_ed2e5975c3_bBut by the time of the ultimate Senate version, which gutted McHenry's bill and made it into the final JOBS Act, that provision went missing. In effect, the Senate took the crowd out of crowdfunding.

The SEC proposes to put the crowd back in.

Here is a sentence from the text of the proposed rules. It's in section labeled "Advertising," which, broadly speaking, limits communication surrounding an exempt crowdfunded offering outside of the chosen funding portal; but on the approved portal, chatting would appear to be okay:

"Notwithstanding the prohibition on advertising the terms of the offering, an issuer may communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary’s platform, provided that an issuer identifies itself as the issuer in all communications."

Even more in the spirit of the original (rejected) McHenry bill, here is a section of the propose regulations that talk about potential investors comparing notes within a forum on the funding portal:

"Communication Channels. An intermediary must provide on its platform communication channels by which persons can communicate with one another and with representatives of the issuer about offerings made available on the intermediary’s platform, provided:

"(1) If the intermediary is a funding portal, it does not participate in these communications other than to establish guidelines for communication and remove abusive or potentially fraudulent communications;

"(2) The intermediary permits public access to view the discussions made in the communication channels;

"(3) The intermediary restricts posting of comments in the communication channels to those persons who have opened an account with the intermediary on its platform; and

"(4) The intermediary requires that any person posting a comment in the communication channels clearly and prominently disclose with each posting whether he or she is a founder or an employee of an issuer engaging in promotional activities on behalf of the issuer, or is otherwise compensated, whether in the past or prospectively, to promote the issuer’s offering."

Are there any administrative law problems with the agency improving the statutory provisions in this manner?

I don't know. But it is a strong signal that the SEC is not as cynical about these rules as the Senate was about McHenry's original bill.

Photo: Leslie Jones, collection of Boston Public Library / Flickr.

Title III crowdfunding rules should be out later today

Sorry we are not live blogging this morning's SEC open meeting, being webcast right now as I write this.

I'm between meetings and can't help but sneak a peek. A staffer, Leila Bham, is right now talking about how the new rules will regulate funding portals, "a new class of broker" under the law, she says.

Capture112Funding portals will not be permitted to be intermediaries. They will not be permitted to have an interest in the issuers who are raising via their sites. (Contrast this with Title II portals for angel investors, where co-investing is expressly blessed.)

Will update this post later with a link to the proposed rules. The vote hasn't been taken, but this webcast has the energy of a moving train . . . 

Feeling sorry for the rule drafters, in advance

So it looks official: the SEC has set up a meeting for tomorrow, Wednesday, to consider proposed rules to implement Title III crowdfunding under the JOBS Act.

(Ordinarily, I would live blog the open meeting webcast. Work commitments are likely to keep me from doing that tomorrow.)

Capture111We won't know until the meeting whether the Commissioners will authorize the release of the proposed crowdfunding rules. But as Sarah Hanks tweeted, it's doubtful that the SEC Chair would have called the meeting, if she didn't think she had the votes to approve the proposal.

Already I feel sorry for the Commission staff. Sorry, because I know many are going blame them for how unworkable the proposed rules will be.

Am I predicting that they will botch translating the Congressional mandate under the JOBS Act Into a workable rule set? No, I am not predicting that.

Instead I am predicting that the SEC will do a credible and fair job of honoring the legislation.

And therein lies the problem.

It is Title III, the crowdfunding legislation passed by Congress, that is not workable. As I've written before, good rule-making can't fix fundamentally broken legislation.

Lobbying group for venture capital firms weighs in on proposed changes to Reg D

This is interesting: the National Venture Capital Association, or NVCA, filed a comment letter with the SEC on the Commission's proposed rules to overhaul Form D.

Typically, this lobbying arm of the venture capital industry sits out policy matters, legislation, and rule changes that impact angels and entrepreneurs seeking seed financing.

523239430_0e69c5d00a_zFor instance, during Dodd-Frank, back in 2010, the NVCA sat out the attack on angel financing and let angels fend for themselves in persuading Congress that it did no good for America's innovation economy to effectively push two thirds of eligible Americans out of the accredited investor category. (The NVCA's policy priority at that time? Taxation of carried interest.)

And when it came to the JOBS Act, venture capital's lobbyists pushed for the IPO on-ramp and the raising of the number of shareholders a private company could have. Title II reforms - i.e., Lifting the ban on general solicitation and adding an angel platform exemption to federal broker-dealer registration requirements - those again were issues left to angels, as far as advocacy from the startup financing ecosystem was concerned.

To my knowledge, the NVCA sat out the opportunity to comment on the general solicitation rule, establishing new Rule 506(c), before it became final on September 23.

The letter is dated September 23, so I assume it is been on the SEC site for some weeks now. I only noticed it yesterday through a tweet from Joe Wallin.

Time permitting, I'll read through it this week and let you know what I think.

Photo: Brother O-Mara / Flickr.

Sliding scale income rules under Title III crowdfunding

Interesting Reuters article by Dave Michaels this week, suggesting that, when it comes to figuring out a particular investor's annual limit under Title III crowdfunding, the amount of an investor's income may be a matter of self-policing, not subject to anything like the 506(c) verification rules.

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There are many, many flaws in Title III. Although the House passed a more implementable bill, when the final JOBS Act was said and signed and done, the Senate had effectively gutted it, almost cynically substituting for McHenry's popular bill a grab bag of every possible impediment. Maybe that was a good thing, maybe that was not a good thing. Depends on what you think about non-accredited people investing in startups.

Having a sliding scale of what people could invest, tied to their income, was always a stupid idea. The meaningful investor protection was in the concept of an annual cap. "An investor may invest no more than X dollars per year." 

Of course, accredited investors may under a 506 deal invest how much they desire, there is no cap. Accredited investors can fend for themselves. But nonaccrediteds may not participate in 506(c) deals.

The dividing line – are you accredited, or are you just pretending to be accredited – is critical in determining whether or not you can participate in 506 deals. So verification of income (or net worth) for purposes of 506(c) crowdfunding actually makes sense.

If the Reuter's article is right, it suggests the SEC may be trying to make workable rules under Title III. (Though I'm not sure Title III is really workable.) But I'm sure the Commission will not be proposing to give up on the idea of an annual cap.

Implementing and verifying that the annual cap (across all Title III deals) is not exceeded for each individual, that is going to be a tough task in and of itself. The better project would be to throw out what Title III wanted and go with my Individual Crowdfunding Account idea.

Photo: Dominic Alves / Flickr.

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