Reuters reports that Representative Patrick McHenry, of North Carolina, who chairs the House Financial Services oversight panel, said he believes the Securities and Exchange Commission lost its ability to enforce the ban on general solicitation after Congress passed the JOBS Act. We wonder how many defense litigators are willing to take that argument to court. The theory could have legs however if it’s true the SEC’s Corporation Finance’s chief counsel, Thomas Kim, wrote an email about his meeting with some other agency lawyers who had raised concerns to him about whether the SEC could enforce the ban “on day 91? if the agency failed to meet the deadline. “I think they are dubious as to whether we could,” Kim reportedly wrote.
In testimony before the before the Subcommittee on Oversight and Investigations, Committee on Financial Services, U.S. House of Representatives, SEC Commissioner Elisse B. Walter offered a glimmer of hope the ban on general solicitation for private placements would be lifted soon. She stated “Although our work on this important provision is still ongoing, the Commission needs to complete this rulemaking promptly and it is a priority for the agency.”
Lona Nallengara, Acting Director, SEC Division of Corporation Finance, also gave testimony before Congress as to what has been done in the JOBS Act rulemaking process, but he shed little light on next steps, timing and priorities.
SEC Commissioner Luis A. Aguilar seems the least enthused about the work done to date on lifting the general solicitation ban. In a speech before the North American Securities Administrators Association, otherwise known as the state securities regulators, he stated “. . . to my profound disappointment, when the removal of the ban was proposed by the Commission, a majority of the SEC’s Commissioners proactively excluded from discussion many of the practical and cost-effective suggestions made by investors and other regulators . . . Because of the decision to ignore the recommendations by investors and other regulators, I consider the Commission’s proposal to be fatally flawed . . . A re-proposal that allows for a real discussion of reasonable alternatives is the only path forward that will adequately address investor protection issues.” In other words, back to the drawing board in his view.
A Forbes article titled “The Trouble With Crowdfunding” discusses the provisions of the JOBS Act which permit crowdfunding for which no rules have been proposed or adopted. The author notes “Despite the sound and fury, the crowdfunding exemption will do little to help small start-ups raise capital. That’s because it will not be economically feasible for most companies to comply with the filing and disclosure requirements; take on the risk of legal liability; and undertake annual reporting obligations to raise a maximum of $1 million in a 12-month period.”
Business Matters, a UK site, highlights an interview which notes “The main platforms seem to be deliberately hiding behind generic warnings, self certifications and cursory due diligence on factual claims and investors will almost certainly lose their money as a consequence of the poor information being provided.”
Some sites currently advertise on a generic basis the opportunity to crowdfund investments to accredited investors which many refer to as “accredited crowdfunding.” If you’re wondering about the legality of this see our post “Accredited Crowdfunding, Internet Advertising and General Solicitation”.
If you want to learn more about traditional private placements, the status of the JOBS Act and other matters, see our materials on “Securities Law Essentials for Growing Companies”.