General Solicitation -Title II- Where to now?

General Solicitation -Title II- Where to now?

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On April 5th, 2012 President Obama signed into law The Jumpstart Our Business Startups Act, known as the JOBS Act, which for the first time in 80 years relaxed the investment securities offering rules, enacted during the Great Depression. Or did it fail to relax these rules? The first glance looks very exciting. However taking a deeper view of the new Title II rules might change the public’s perspective.
Much debate is going around deciding if the rules have actually been truly relaxed. The rules certainly have changed, but there is no consensus agreement that these new rules constitute a relaxation to the old rules. Let’s examine one aspect of the change.

In a Regulation D offering Rule 506(b), it is currently required that the issuer ensures no general solicitation i.e. it is a “non-public” offering or in other words, the general public need to be shielded from the financial investment in question. Knowledge of this investment needs to be spread privately among accredited investors i.e. people earning >$200,000 pa or >$300,000 pa when taken jointly OR an investor who has a self-worth of >$1, 0 million dollars excluding their primary residence. (There are other criteria which we won’t touch on now). The onus to prove these criteria belongs to the investors, not the issuer. In addition the owner can admit 35 non accredited but educated investors (making allowance for a family and close friend investing opportunity). These rules for this regulation still exist today when no advertising is undertaken. However, we all know that the chances of getting a larger range of investors come when we cast a wider net. Enter the new JOBS Act.

The Title II JOBS Act changes, enacted on the 23rd September, 2013, allows for general solicitation and advertising in the form of Regulation D 506 (c) for private placement offerings. However, the rules appear not so cozy. In response to having the right to ‘reach the market’ with the offering, the issuer has some added responsibilities. Let’s take a look at these. Firstly, the advertising of the offer can be done anyhow using any means possible. The story told obviously has to be correct and credible. Those of us who communicate with the public today can testify to the challenges in getting everyone to understand the message correctly. Perfect communication is always a challenge. Secondly, EVERY investor needs to be accredited and the onus of proof now moves from the investor to the issuer. This creates a tremendous responsibility shift in solicited Regulation D offers. The verification responsibility can however be done by outsiders. Outsiders being, attorneys, registered investment advisors, CPA’s and Broker Dealers.

This outside verification process still does not exempt the issuer from the responsibility of ensuing all investors are fully accredited. Additionally, the offer needs to be communicated via Form D to the State SEC 15 days BEFORE advertising, 15 days AFTER the sale of the first share and 30 days AFTER the sale of the final share. Failure to do this holds a 1 year suspension penalty before the next round of fund raising can continue (this reporting rule is not completely finalized and in the interim the issuer will use the current Regulation D form for the first step only).

Finally, the bad actor disqualification has come into effect. It is up to everyone to ensure that bad actors don’t participate. Bad actors being people with ‘previous’ history in carrying out ‘bad investor’ actions. In the world of advertising and general investor relations this becomes a challenge on its own. So where to now?

It is clear that the new rules are extremely exciting. However, once the road has been walked upon and eventually well-trodden the real answers will be available. The early adopters will shine some light, good and bad. Until then, we all walk on new territory. The future is exciting to say the least. We will keep you updated.

IFC Financial Group has positioned itself as a small-to-mid cap finder and consultant to help those who require assistance in developing their future strategic needs. The JOBS Act has created much optimism and we share in that. No matter what your needs are we would love to hear from you. Join us through our email or Linkedin,Twitter and Facebook connections to stay in touch.