The JOBS Act
Last week, President Obama signed the Jumpstart Our Business Startups Act (“JOBS Act”) into law. The JOBS Act includes several significant changes to the fundraising provisions contained in the federal securities laws: the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).
Legislative supporters of the JOBS Act said its intent is to create new jobs and stimulate the economy by easing burdensome regulations that inhibit investment in small business and stifle job growth. Opponents believe, albeit well intentioned, the JOBS Act could have unintended consequences for the investing public.
Two of the most talked about provisions concern “crowdfunding” and offerings made under SEC Regulation D Rule 506 (“Reg. D”).
Title III of the JOBS Act contains a provision exempting “crowdfunding” issues from registration. The Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (“CROWDFUNDING Act”) permits issuers to raise $1 million in a 12-month period from investors over the Internet. The CROWFUNDING Act sets some limitations on the amount a particular investor can invest based upon the investor’s income and net worth.
Issuers who claim an exemption under the crowdfunding provision will be required to disclose minimal information to the Securities and Exchange Commission (“SEC”). However, the JOBS Act contains a provision that preempts state securities regulators from reviewing or registering securities sold under the crowdfunding exemption. This preemption clause is strongly opposed by state securities regulators, including the North American Securities Administrators Association (“NASAA”).
According to the NASAA, state regulators do not object to the concept of crowdfunding in general. Prior to passage of the JOBS Act, NASAA had actually been working on a model rule that would have allowed crowdfunding, but would have preserved the states’ ability to head-off potential fraudsters and protect the investing public-at-large. This preemption clause means that the SEC will solely be responsible for policing the new crowdfunding market and deterring fraud. Critics argue that the SEC lacks adequate resources to effectively monitor these securities before they are sold to the general public. As a consequence, crowdfunding offers are not likely to receive much regulatory scrutiny until after an allegation of wrongdoing has been made. Congress has given the SEC 270 days to develop and implement rules concerning crowdfunding.
NASAA cites the National Securities Markets Improvement Act (“NSMIA”) of 1996 as example of what can potentially go wrong with the state preemption provision contained in the JOBS Act. NSMIA includes a similar provision preempting state regulators from reviewing private offerings made under Reg. D and requiring the SEC alone to police all Reg. D offerings.
In a 2009 report issued by the SEC’s Office of Inspector General (“OIG”), the OIG concluded that the SEC does not substantively review Reg. D offerings and generally, the SEC doesn’t take any action when it discovers that issuers failed to comply with the requirements of Reg. D exemptions. The NASAA claims that since NSMIA was passed, unscrupulous private offering promoters are using Reg. D provisions to evade review and fly under the regulatory radar since they know the offerings will receive little scrutiny by the SEC. According to a 2011 survey conducted by the NASAA, Reg. D. offerings are at the center of the bulk of state enforcement actions. NASAA is concerned that same thing will happen with crowdfunding under the JOBS Act.
The JOBS Act also changes the rules for the marketing of Reg. D offerings. Previously, securities laws prohibited general advertising of Reg. D offerings to the public-at-large, limiting the marketing of Reg. D offerings only to individuals who had an established prior relationship with the issuer. Under Title II of the JOBS Act, issuers claiming a Reg. D exemption will be able to publicize and generally solicit investors in print and through the Internet. As such, investors should be prepared to see their mailboxes bombarded with any manner of investment offerings and sales pitches. However, Reg. D offerings are still limited to only accredited investors. Congress has given the SEC 90 days to develop and implement rules concerning the changes to Reg. D.
Although the JOBS Act was enacted to provide new and innovative fundraising opportunities for many small businesses, critics worry that it will instead, reduce the amount of reliable information available to investors and make securities law enforcement much more difficult.
The Florida securities lawyers at Rabin Kammerer Johnson represent investors nationwide in FINRA arbitration matters. Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at Rabin Kammerer Johnson for a free and confidential consultation by calling toll free at 877.915.4040.
