The new Jumpstart Our Business Startups Act (the “JOBS Act”), signed into law on April 5, 2012, contains a number of substantial revisions to U.S. securities laws that will affect the manner in which businesses may obtain private financing, including (among other things) removing the restriction on general solicitation and advertising when selling securities in a “private placement” (the sale of a company’s securities in a transaction that is exempt from federal registration requirements). The use of any general solicitation or advertisement in connection with the sale of securities has been forbidden under U.S. securities laws since the 1930’s. We expect that these changes will result in an explosion of securities offerings and, hopefully, easier and more efficient capital formation in the U.S.
The vast majority of private placements of securities in the U.S. are structured to comply with the provisions of Securities and Exchange Commission Rule 506 of Regulation D. Rule 506 contains no limit on the number of accredited investors who may purchase the securities, and no dollar limit on the amount of money received by the issuer from the sale of the securities. In addition, securities sold in compliance with Rule 506 are exempt from state law registration or qualification provisions. Also, Regulation D does not require any specific form of disclosure to investors in an offering made solely to accredited investors. As a result of these benefits, most Rule 506 private placements are sold only to accredited investors.1 However, Rule 506 currently provides that a company selling securities in a Rule 506 offering cannot engage in any general solicitation or advertising in connection with the offering.
Under this new (and we think, remarkable) legislation, the Securities and Exchange Commission (the “SEC”) has 90 days after enactment of the JOBS Act to revise its regulations to provide that the prohibition against general solicitation and general advertising contained in Regulation D will not apply to Rule 506 private offerings in which all purchasers of the securities are accredited investors. In addition, until now a broker acting on behalf of a company that was conducting a private placement was limited to contacting only those potential investors with whom the broker had a pre-existing relationship. Under the revised rules, no pre-existing relationship will be required. We believe that one effect of these rule changes will be to allow issuers, brokers and others to broadly solicit potential investors from the general public through all forms of advertising and all other forms of communication, including social media. The JOBS Act specifically anticipates that people may maintain platforms that permit offers, sales, or purchases of securities, that permit negotiation with respect to securities, or that permit general solicitations, general advertisements or similar related activities by issuers of such securities, whether online, in person, or through any other means, and that persons who establish such platforms will be exempt from the broker-dealer registration requirements of the federal securities laws.
Once the SEC revises Rule 506 in accordance with the JOBS Act, companies seeking capital will have unprecedented access to accredited investors. Accredited investors will have unprecedented access to investment opportunities in private offerings.
In addition, the benefits of the JOBS Act will not just apply to start-ups or privately-held companies. Public companies may determine that it is faster and easier to conduct a Rule 506 offering (which is not subject to SEC review) than to file a registration statement with the SEC and work through a more regulated and time-consuming process.
We expect to provide further analysis and comment after the new rules are promulgated.