August 27, 2013

Where is Crowdfunding?

Well over a year after the enactment of the JOBS Act, we still await movement on the SEC’s rulemaking under Title III, which provides the framework for exempt crowdfunding offerings to non-accredited investors, subject to a $1 million cap over a rolling 12-month period and dollar limits based on an investor’s financial position. As this Washington Post article notes, the SEC Staff has indicated that crowdfunding rules can be expected sometime this fall, however these would presumably be proposed rules, meaning that final rules could not be expected until well into 2014 at the earliest when you factor in the need for FINRA to also create a regulatory system for funding portals. As a result, the ability to do exempt crowdfunding offerings remains limited, except that many are anticipating the ability to do more accredited investor-only crowdfunding offerings once general solicitation is permitted under Rule 506 after the September 23, 2013 effective date of those JOBS Act mandated rule changes.

Meanwhile, the SEC’s proposed amendments to Regulation D and Form D in response to investor protection concerns arising from lifting the ban on general solicitation have been drawing fire as not being faithful to the JOBS Act’s goal of promoting capital formation. As noted in this letter from AngelList CEO Naval Ravikant, “[t]he proposed rules appear to be tailored to how Wall Street raises funds, not the startup community.” Ravikant goes on to note the significant consequences for startups of instituting a 15-day in advance filing requirement for Form D, as well as the temporary requirement to file written solicitation material and legending requirements. Founders of startups, angel investors and others in that community have echoed this sentiment in the comment file.

Despite the delays and debate, crowdfunding still goes on – either to accredited investors behind password walls or in transactions that don’t involve the offer and sale of a security. It has proven itself to not be just another internet-age fad, so it remains to be seen whether some workable securities laws can be implemented to make it a viable alternative for capital raising.

EB5 Visa Programs: Another Beneficiary of General Solicitation

One area of capital raising that has not, until recently, received a great deal of attention is the EB5 Visa program, which was created by Congress back in 1990 as a means to spur capital investment in the United States. Under the program, foreign nationals can get access to a green card by investing in certain projects that are targeted to create jobs and encourage economic development. In many cases, the regional centers that raise money under EB-5 programs have relied on a combination of Regulation S and Rule 506 of Regulation D as exemptions from registration under the 1933 Act, and as a result their marketing activities to foreign nationals was limited by the prohibition on general solicitation and general advertising, as well as the prohibition on directed selling efforts.

With the adoption of Rule 506(c) as a new alternative for exempt offerings, EB-5 investments could be marketed more freely in the United States to foreign nationals who are located here, which could provide a significant new source of capital for these projects. Due to the requirements for qualifying as an EB-5 program, much of the capital is directed into real estate projects, including public-private partnerships developing infrastructure projects. With lingering investor protection concerns around this market, I expect to continue to see a focus by the SEC and the USCIS on maintaining investor protections and combatting fraud, particularly given that a person’s immigration status and investment are both tied up in these types of offerings.

The SEC’s New Admission Policy in Enforcement Cases: Collateral Consequences

Last week, I mentioned how the SEC’s new policy requiring admission of misconduct was implemented in a case against Harbinger and Philip Falcone. In The D&O Diary blog, Kevin LaCroix notes some of the important collateral consequences that admission of guilt may have, including with respect to D&O insurance.

– Dave Lynn