133 posts categorized "JOBS Act"

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.


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.

Weekend Read: WSJ Accelerators Post on Pitch Events and General Solicitation

This weekend please read an article I wrote for The Accelerators blog of the Wall Street Journal, The Trojan Horse of Accredited-Investor Verification.

6960882500_cc7fccd4d4_oThe piece gets into how some angel groups, pitch event promoters, and demo day organizers are dealing with new Rule 506(c). Basically, the days of a de facto industry practice of ignoring the Rule 506 prohibition on general solicitation and general advertising are over.

Now that it is okay to generally solicit, it's also time to come to terms with what came part-and-parcel with such over permission: the need to take reasonable steps to verify the accredited status of all purchasers.

It's going to take some time for the ecosystem to sort things out.

Check out this Pando Daily post that Doug Cornelius quoted from in his weekly roundup post. Do you think the newly conservative steps demo days promoters are taking, as recounted by the Pando Daily reporter, Erin Griffith, cut the mustard?

Please do read the piece for the WSJ Accelerators!

Photo: D Services / Flickr.

Three longer reads for where we are after General Solicitation Day

We are now living in the second day after General Solicitation Day. All trying to take stock of what has happened, and how the landscape is different.

And there is no shortage of media coverage! (Here, from a news angle, is a good overview from the Wall Street Journal: General Solicitation Brings Startups Capital, Risks. I was interviewed for this article and love the quote they got from me: "The government is doubling down on the idea that accredited investors can fend for themselves.")

PhotoBut today I wanted to call out three different, longer-form pieces of writing, each published within the last week. Each, in a different way, lends a deeper perspective on where we in the startup financing ecosystem are now.

Each will be a reference piece in the weeks and months to come.

1. Paul Spinrad's take on where we are, how we got here, and how all the different pieces fit together.

Here is an article that Paul Spinrad published on a PBS website: Online Platforms Give the First Public Look at Private Equity. As I said on Twitter yesterday, Paul's is the best written, broadest article yet on general solicitation and the changes to private financing rules.

Among the delights of Paul's well written survey are: an explanation of how public offerings came to be squeezed into a private exemption framework; the balance or contrast of considerations when approaching policy for accredited and non-accredited crowdfunding; and how private equity platforms are rolling out new features to facilitate the new rule set.

On Monday in GeekWire, I tried, not very effectively, to point out some of the new features on some of the leading online platforms. Paul's take on the same topic is far more accomplished. And that topic is only one facet of his survey.

2. Trent Dykes', Megan Muir's and Kiran Lingam's whitepaper on do's and do not's at demo days and pitch events.

This one, Demo Days, Pitch Events and the New Reg D, is controversial. I've had an earful from several people already on how this whitepaper may get one or another thing wrong.

But I greatly admire the ambition and timeliness of it. The question that the rest of us hem and haw about – am I automatically generally soliciting if I show up at a demo day or pitch event? - they tackle.

Whether or not you agree with the protocols and checklists they lay out, Dykes, Muir and Lingam are calling out the right factors to consider and giving laypeople the means to educate themselves about general solicitation.

3. The Gunderson law firm's comment letter to the SEC on the proposed Reg D rules.

This is a letter published on the SEC's received comments page, signed by a Gunderson partner, Sean Caplice.

There are a ton of comment letters on the proposed rules, none too few from big law firms.

What's remarkable about the Gunderson letter is that it provides answers to all 101 "requests for comment" posed by the SEC in its proposing release.

Most commentators either cherry pick which of the SEC's questions they want to answer, or skip the agency's questions altogether and comment from the perspective of the commentators' own agenda or frames of reference. For tackling all 101 requests for comment, and for that reason alone, I think the Gunderson comment letter is a touchstone. (Kudos to Joe Wallin for pointing the letter out to me.)

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