The JOBS Act l Rule 506
The Jumpstart Our Business Startups (“JOBS”) Act was signed into law by President Obama on April 5, 2012. The JOBS Act required the Securities and Exchange Commission (the “SEC”) to issue final regulations regarding the portions of the JOBS Act relating to the elimination of general solicitation in Rule 506 offerings within 90 days of its enactment to allow general advertising and solicitations of investors, provided sales are made solely to accredited investors, and the issuer takes reasonable steps to verify that purchasers in fact are accredited investors. The JOBS Act also required that the SEC issue its required new rules, 270 days after the JOBS Act’s enactment.
Much of the publicity concerning the JOBS Act pertains to crowdfunding and the SEC’s failure to meet its December 31, 2012 deadline to establish its rules. The media and market participants embraced the possibility of crowdfunding. The game changer for companies seeking to raise capital is not crowdfunding but elimination of the ban on general solicitation and advertising in Rule 506 offerings. On July 10, 2013, the SEC completed its rules eliminating the ban on general solicitation and advertising in Rule 506 offerings.
The primary differences and similarities between crowdfunding and amended Rule 506 are summarized below.
Maximum Investment l Rule 506 l Crowdfunding
Crowdfunding limits the amount an investor can invest in an offering in a 12-month period to 10% of the investor’s annual income or net worth (incomes of $100,000 or more) or the greater of $2,000 or 5% of annual income or net worth (incomes of less than $100,000).
Amended Rule 506 does not put a maximum cap on the amount an investor can purchase in a Rule 506 securities offering.
Aggregate Offering Amount l Crowdfunding l Rule 506
Crowdfunding caps an amount an issuer can raise to $1 million in any 12-month period while Rule 506 has no cap. Issuers can raise unlimited funds if they comply with the Rule 506 exemption.
Tradability of Securities l Crowdfunding l Rule 506
Securities sold in crowdfunding transactions are restricted securities. Similarly, securities sold in Rule 506 offerings with or without general solicitation are also restricted. This means under both crowdfunding and Rule 506, the securities are subject to a one-year restricted period.
Availablility of Securities Exemption l Crowdfunding l Rule 506
Crowdfunding is limited to certain issuers. Crowdfunding cannot be used by issuers of SEC reporting companies other than “voluntary filers” and investment companies. Rule 506 however, is available to all issuers, reporting and non-reporting.
Intermediaries l Broker-Dealers l Crowdfunding l Rule 506
Crowdfunding offerings must be made through a registered broker-dealer or registered funding portal. Additionally, broker-dealers and/or funding portals may not solicit investments, offer investment advice or be paid transaction based compensation. Amended Rule 506 does not have any limitations on the payment of commissions and/or transaction based compensation to broker-dealers or intermediaries.
Disclosures l Filings l Crowdfunding l Rule 506
Crowdfunding requires a disclosure document to be filed with the SEC at least 21 days prior to first sale, and requires scaled financial disclosure, including audited financial statements for raises of over $500,000. As proposed, crowdfunding will require annual reports and possibly more frequent reports be filed with the SEC. Rule 506 does not require a filing prior to the Issuer’s first sale and only requires that the Issuer file a Form D with the SEC. As a result of amended Rule 506, Form D now has a box for the issuer to check if it engages in general solicitation or advertising of its offering.
Advertising and General Solicitation l Rule 506 l Crowdfunding
Crowdfunding does not allow advertising or general solicitation except solely to direct investors to the appropriate broker/funding portal. Amended Rule 506 allows general solicitation and advertising so long as sales are made only to accredited investors.
Bad Actors l Crowdfunding l Rule 506
Crowdfunding requires extensive due diligence of the background of management and large stockholders. Rule 506 does not have such a requirement; however, the SEC amended Rule 506 to eliminate its use by issuers with certain bad actors.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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