SEC Lifts Solicitation Ban for JOBS Act Investments

(AccountingToday) The Securities and Exchange Commission adopted a new rule last week to implement a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings for business startups, while also adopting rules to discourage fraudsters from touting the investments and to add new protections for investors

Companies seeking to raise capital through the sale of securities generally must either register the securities offering with the SEC or rely on an exemption from registration. Most of the exemptions from registration prohibit companies from engaging in general solicitation or general advertising—that is, advertising in newspapers or on the Internet among other things—in connection with securities offerings. Rule 506 of Regulation D is the most widely used exemption from registration.

In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors. Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations or charitable organizations that meet certain minimum asset levels.

In April 2012, Congress passed the Jumpstart Our Business Startups Act, or JOBS Act. Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506 provided that the sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors. By requiring the SEC to remove this general solicitation restriction, Congress wanted to make it easier for a startup company to find investors and thereby raise capital.

While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.” In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities.

The law also directed the SEC to amend Rule 144A under the Securities Act, an exemption from registration that applies to the resale of securities to larger institutional investors known as qualified institutional buyers, or QIBs. Under current Rule 144A, offers of securities can only be made to QIBs. Under the new rule, Rule 144A is amended so that offers of securities can be made to investors who are not QIBs as long as the securities are sold only to persons whom the seller reasonably believes are QIBs.

To read the complete article, go here, or for more information about how this will affect your company’s ability to raise capital, call or e-mail Austin Buckett at or (719) 579-9090.

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