SEC issues final rules on “General Solicitation of 506 Offerings”

SEC issues final rules on “General Solicitation of 506 Offerings”

14:20 16 July in Blog

Screen Shot 2013-07-16 at 10.28.42 AMCongress with bipartisan support passed the JOBS (Jump Start our Business Startup) Act on April 5, 2012. After a delay of over a year, the SEC finally met it’s legislated mandate and issued rules for Title II of the Act (General Solicitation of 506 Offerings) that was intended to make it easier for start-ups to raise capital by allowing them to openly solicit accredited investors. However, to protect Americans from entering into capitalism (owning the capital Marx called the means of production) the SEC stood firm and left extraordinary bureaucratic safeguards that do little to aid start-ups in capital formation and will likely make angel investing more costly and complex in filing the Reg D forms.

Angels exist because Reg D defines accredited investors and allows these investors to invest in companies without requiring costly, complex and time-consuming disclosures that do little to mitigate the investment risks associated with start-ups. By forming a club and seeking companies, there is no open solicitation (which the SEC associates with fraud and misrepresentations to which  the average American will fall victim).

If an issuing company uses a form of general solicitation in attracting investors, it must take extraordinarily measures to confirm that the investors actually meet Reg D requirements. The start-up has to either get direct verifications from it’s investors of their income or net worth or must get documents from a banker, lawyer, CPA or broker to vouch for the investor.

The real problem that emerges is the risk to angel clubs investing alongside individuals who, if not properly vetted, may not be accredited. Historically, we had a safe harbor if they signed a document claiming to be accredited. In one sense, this will make club investing more efficient compared to open solicitation, but that was not the intent of the legislation. The goal was to make the capital markets more efficient and that’s not what’s happened.


Ken Kousky
No Comments

Post A Comment