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SEC Finalizes “Crowdfunding General Solicitation” Regulations: Full Steam Ahead

July 15, 2013 | Legal Alert
Markley S. Roderick, William S. Skinner

Since President Obama signed the JOBS Act into law on April 5, 2012, we have been waiting for the SEC to finalize the rules on Crowdfunding, which has the potential to change investing as we know it.

The SEC finally acted, at least on one of the two components of Crowdfunding. Sometime in mid-September, companies will be allowed to use “general solicitation” in certain “Rule 506 offerings.” This means that companies raising money will be allowed to advertise (e.g., in newspapers or on Facebook), something that has never been allowed before. The rules governing the other component of Crowdfunding, where small issuers will be allowed to raise money through Internet portals from small, unsophisticated investors, will have to wait for later in the year.

Even so, these new regulations mark the largest change to the securities laws in almost 80 years. Companies will now be allowed to raise money from accredited investors (in the case of individuals, those with over $1 million of net worth or incomes over $200,000 per year) through social media, print materials, email, and other means. Not only will companies have greater access to the capital they need, but the new rules are likely to significantly disrupt the money-raising industry, displacing brokers, lawyers, and other middlemen just as the Internet has displaced so many middlemen before them.

Now the technical rules.

The rules allow general solicitation and general advertising where:

Whether the company has taken “reasonable steps” will be determined on a case-by-case basis. Among the relevant factors:  

When the regulations were proposed last August, many people complained about the absence of hard-and-fast rules and the resulting ambiguity. The final rules take a large step in the direction of certainty by providing that a company will be considered to have taken reasonable steps to verify that a natural person is an accredited investor if it does any of the following:

These steps are neither exclusive nor mandatory. The final rules also discuss other factors and procedures.

In addition to taking reasonable steps to verify that purchasers are accredited, the company must also have a reasonable belief that they are accredited. This has always been part of Rule 506 and was not changed by the JOBS Act.

NOTE: These new rules offer enormous opportunities for entrepreneurs seeking to raise money for their existing businesses or start new businesses. Please contact  Mark Roderick or Bill Skinner if you would like to discuss your idea.

Stay up-to-date on news and links to important information pertaining to the JOBS Act and Crowdfunding by reading Mark Roderick's Crowdfunding blog. This legal alert, "SEC Finalizes 'General Solicitation' Regulations: Full Steam Ahead," along with updates, also can be found on his blog.

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