As I previously reported, on April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), making sweeping changes to federal laws regulating capital formation, and dramatically enhancing the ability of start-ups, emerging private businesses and public companies to raise money from the public. Some of these changes went into effect immediately – while others await the enactment of enabling rules by the SEC in 2012 and 2013.
One of the more significant changes to existing law was a directive to the SEC to promulgate rules expanding an existing exemption from SEC registration for private placements – Rule 506 under SEC Regulation D. As amended, Rule 506 would allow companies to solicit investors using general solicitation and general advertising so long as all of the purchasers in the offering were “accredited investors.” The JOBS Act specifically requires the SEC to adopt rules implementing the amendments to Rule 506 within 90 days of the enactment of the JOBS Act.
The change in federal securities laws allowing general solicitation and advertising in an unregistered offering is a major departure from the philosophy embodied in federal securities laws since 1933 – so much so that even an act of Congress – with its clear mandate that the SEC “shall revise its rules within 90 days of the enactment” – was not enough to move the SEC to promulgate these rules within the 90 day deadline.
In sworn testimony by SEC Chairman Mary Shapiro on June 28, 2012, she advised the House of Representatives Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs Oversight and Government Reform Committee, that the SEC would be unable to meet this 90 day deadline, effectively meaning that issuers will not be able to utilize the expanded Rule 506 until the SEC acts at some time in the future. In Chairman Shapiro’s words:
“The rulemakings to revise Rule 506 and Rule 144A are both required to be completed within 90 days of enactment of the JOBS Act. As I stated to Congress prior to the passage of the Act, time limits imposed by the JOBS Act are not achievable. Here, the 90 day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input. Although we will not meet this deadline, the staff has made significant progress on a recommendation and economic analysis, and it is my belief that the Commission will be in a position to act on a staff proposal in the very near future.”
This does not bode well for companies waiting to use this expanded exemption, and more importantly may not bode well for the timing of the adoption of other enabling SEC regulations which are necessary for certain JOBS Act provisions to go into effect. A notable example is the groundbreaking and highly controversial exemption under the JOBS Act for “crowdfunding”, which will allow companies to raise up to $1 million per year from an unlimited number of unaccredited investors meeting specified requirements without a full blown, expensive and time consuming SEC registration – and without having to generally comply with state securities laws requiring registration. Although the JOBS Act requires that this exemption be implemented by the SEC within 270 days of the enactment of the JOBS Act, it is very possible that this deadline, and others, may fall by the wayside.
And for those wondering whether the outcome of the November 2012 elections will alter the course of either the JOBS Act or Dodd-Frank law – either at the SEC in terms of its rulemaking process – or in Congress – the wait and the uncertainty continues.
About the Author – Samuel S. Guzik is a corporate and securities attorney and business advisor admitted to practice before the SEC and in New York and California, with over 30 years of experience. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies. For additional information regarding Mr. Guzik and his firm, Guzik & Associates, please visit his website at www.guziklaw.com.
