The Securities and Exchange Commission has re-opened the comment period through November 4 for regulations issued under “the JOBS Act” concerning crowdfunding. Since its release of amendments to Regulation D, Form D and Rule 156 on July 24, concern has been growing in the startup community that the SEC rules go against the spirit of the JOBS Act by requiring additional compliance steps not envisioned in the law.
More specifically, the SEC’s rules implementing removal of the ban on general solicitation could actually result in a reduction of investments in startups. As written, the law requires issuers to undertake “reasonable steps to verify” that investors are accredited when relying on Rule 506(c). However, in defining reasonable steps, the SEC rules provide a listing of non-exclusive means of verifying whether an investor is accredited. One of these verification safe harbors requires issuers to review:
“copies of any Internal Revenue Service (“IRS”) form that reports income, including, but not limited to, a Form W-2 (“Wage and Tax Statement”), Form 1099 (report of various types of income), Schedule K-1 of Form 1065 (“Partner's Share of Income, Deductions, Credits, etc.”), and a copy of a filed Form 1040 (“U.S. Individual Income Tax Return”), for the two most recent years, along with obtaining a written representation from such person that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.”
The purpose of the JOBS Act was to ease the way for startups to access capital from multiple investors. However, this SEC rule goes against the spirit of the law in suggesting that startups must review detailed tax information in order to establish that it took reasonable steps to determine whether the investor is accredited. It’s entirely possible that this rule would curtail investment, as many accredited investors would balk at supplying detailed tax information to a startup.
Another concern is the requirement that startups file Form D 15 days in advance of any general solicitation. Under current rules for filing Form D in exempt offerings, Form D must be filed within 15 days after the sale of securities. Requiring startups to file this detailed information in advance poses an additional burden on startups not envisioned under the JOBS Act. In reality, this requirement places a 15-day hold on the ability of these firms to raise capital, which was clearly not envisioned under the JOBS Act.
In its own description of the law the SEC stated: “Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations.” We believe the SEC needs to correct these unnecessary and overly burdensome regulation errors in order to put in place the clear intent of the JOBS Act.
