Thursday, September 19, 2013

Changes in Jobs Act - Summary for StartUps

Note: We are not lawyers, this is not legal advice.  Please consult your lawyer for details

The revised JOBSACT will change the regulations for solicitation of funding.  Most of us know this as the start to really open "crowdsource" funding, (via "general soliciation") but there are many other serious implications as well. Know the rule changes.  Consult your lawyer.  Be compliant.  Here are some changes to expect

  • Reach more investors. General solicitation gives access to investors well outside your  local investment community. Communication tools such as blogs, e-mail newsletters and social media will let you  reach many more potential investors. The amended JOBsAct rules will allow startups to use social media, email and other methods to communicate with the general public to find new  accredited investors. 

  • Burden on you to verify accredited investor status. Start ups are required to take "reasonable steps" to verify that investor under Rules 506(c) are "accredited investors". Companies should talk with their lawyer about how best to confirm that all investors qualify .  Membership in an investing group, such as the Seattle Angel conference,  may facilitate or provide the "reasonable steps" for the entrepreneurs.  The SEC  indicates that having an investor check a box on a questionnaire is not sufficient to verify accredited status,additional information must be obtained.

  • You will have to differentiate yourself even more. With general solicitation available,  more investors will learn about potential startup investments. You will have to differentiate yourself from the maddening crowd. You will need to consider what types of solicitation and advertising are appropriate for your business, and level of investment required.  

  • Getting deep and intrusive with your investors.  
  • If you use the new general solicitation rules outside of an angel investing group or conference, you must request personal and private financial information from investors, or must find some other appropriate way to demonstrate that the investors are accredited. Requesting such information, or obtaining other verification may deter potential investors. 

  • Role of angelfunding sites and angel groups   
  • The new rules further highlight the importance of Angel Groups, and  web-based platforms that facilitate investing.  General as well as sector focused Angel websites, angel groups, and and other matchmakers will help entrepreneurs and investors to verify accredited status in accordance with the new rules.  There will be a lot of competition and complexity until the market shakes out.  Find out where the investors are going and planning to look for deals, and make sure you're there, especially for your location and business sector, as many Angels like to invest locally and/or in a specific business sector.

  • Existing Rule 506b is still in effect.  
  • Issuers do not need to use the new rules. The SEC has made it clear that these changes  are limited to transactions under new Rule 506(c). Issuers may continue to rely on Rule 506(b) and conduct private offerings the "old way," provided that no general solicitation or general advertising is used.
  • Possible Additional Filings and Disclosures: 
  •  New proposed rules (not yet in effect) would further require disclosures before solicitation.
  • Disqualification of "bad actors"

    The SEC also changed Rule 506 to disqualifies start ups from relying on Rule 506 if "bad actors" are participating in the offering.   If your company has a current or previous "issuer" with any of the following,  Do not pass go...
    • Criminal convictions in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction must have occurred within 10 years of the proposed sale of securities (or five years in the case of the issuer and its predecessors and affiliated issuers).
    • Court injunctions and restraining orders in connection with the purchase or sale of a security, making of a false filing with the SEC, or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order must have occurred within five years of the proposed sale of securities.
    • Final orders from the Commodity Futures Trading Commission, federal banking agencies, the National Credit Union Administration, or state regulators of securities, insurance, banking, savings associations, or credit unions that …
      • Bar the issuer from associating with a regulated entity, engagingin the business of securities, insurance or banking, or engaging insavings association or credit union activities, or…
      • Are based on fraudulent, manipulative, or deceptive conduct andare issued within 10 years of the proposed sale of securities.
    • Certain SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment companies, and investment advisers and their associated persons.
    • SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federal securities laws.
    • SEC stop orders and orders suspending the Regulation A exemption issued within five years of the proposed sale of securities.
    • Suspension or expulsion from membership in a self-regulatory organization (SRO) or from association with an SRO member.
    • U.S. Postal Service false representation orders issued within five years before the proposed sale of securities
If in doubt about the new rules, check with your lawyer. The last thing you want to do is inadvertently put your startup on the wrong side of the general solicitation rules.

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