As discussed in our Client Alert distributed last week1, on April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act” or the “Act”). Some parts of the Act, such as the new category of “emerging growth companies” and the new thresholds for registration and deregistration under Sections 12(g) and 15(e) of the Securities Exchange Act, became effective immediately, while others, such as the “crowdfunding” exemption, require SEC rulemaking before becoming effective.
On April 23, 2012, the SEC issued the following strongly-worded reminder that persons engaged in crowdfunding activities prior to adoption of final rules will be viewed as violating the federal securities laws and thus potentially subject to enforcement actions by the SEC and state securities regulators:
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.
This statement follows on the heels of a civil enforcement action brought by the SEC only five days after passage of the Act against a Silicon Valley man who, according to the SEC’s press release, “raised millions for two Internet start-ups by falsely promising investors that his companies were on the verge of undergoing successful initial public offerings and were well on their way to becoming the ‘next Google.’”
Although the offerings were not, strictly speaking, conducted as crowdfunded offerings, the broad-based nature of the offerings (which raised over $7 million from more than 100 “largely inexperienced” investors) presented investor protection concerns similar to those posed by crowdfunding.
Together, these SEC actions send a strong message that the SEC will continue to pursue illegal crowdfunding activities while it works to complete the rulemaking mandated by Title III of the JOBS Act.
We will continue to provide updates as rules are proposed and circumstances warrant.