THE JOBS ACT: A WELL-INTENDED STEP FORWARD?
Adnan S. Merchant*
I.
II.
III.
IV.
V.
INTRODUCTION .................................................................................. 52 SECURITIES REGULATIONS AND THE INTRODUCTION OF
CROWDFUNDING ............................................................................... 54 A.
The Scope of Securities Registration ....................................... 54 B.
Exemptions and the Introduction to Crowdfunding ................ 56 1. The Private Offering Exemption and Regulation D ......... 57 2. Donation Crowdfunding—The Way Around .................... 58 C.
The Specific Ban on General Solicitation and Advertisement
and its Rationale...................................................................... 61 THE JOBS ACT TITLE II AND III ....................................................... 62 A.
A (Very) Brief Legislative History ........................................... 62 B.
Title II ...................................................................................... 63 C.
Title III..................................................................................... 65 A WELL-INTENDED STEP FORWARD? ............................................... 69 THE POSITIVE FUTURE FOR START-UPS ............................................ 73 I. INTRODUCTION
On April 5, 2012, President Barrack Obama signed into law the
landmark legislation known as the Jumpstart Our Business Startups Act
(JOBS Act).1 The JOBS Act seeks to go far in the way of opening up new
markets for small business.2 It attempts to reduce some strict securities
regulations with regards to advertising and solicitation of funds and to open
up the general public as an emerging capital market, allowing Emerging
Growth Companies (EGCs) as well as smaller startup businesses to go
directly to the general public to raise funds.3
Most of the JOBS Act is aimed at greatly reducing regulatory
burdens for small businesses in the way of reaching out to the public to
raise capital.4 Specifically, the act achieves these goals through two distinct
ways in Title II and Tittle III of the JOBS Act.5 Title II lifts the ban on
*
The author is a graduate in the Texas Tech University School of Law, Class of 2014. Mr. Merchant
has a background in private-equity and corporate structuring for start-ups. He is also a striving social
entrepreneur and is interested in starting companies that can change the world for the better. Mr.
Merchant would like to thank professor Eric. A Chiappinelli, Frank McDonald Endowed Professor of
Law at Texas Tech University School of Law, a mentor and a friend, for without whom this article
would never have been possible.
1
Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306(2012).
2
See id.
3
See id.
4
See id.
5
See id.
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JOBS ACT
53
general solicitation and advertising to the general public.6 Title III is the
provision of the JOBS Act allows for equity crowdfunding—the
phenomenon of raising small amounts of money online from a large
number of people, namely the public at large.7 Both provisions are subject
to specific criteria, requiring full compliance in order for investors to take
advantage.8 This paper will cover only these two sections from the JOBS
Act, as these sections more directly impact small businesses and start-ups.
As is the case with most legislation, critics are aplenty. They argue
quite fervently that lessening securities regulations is inviting the possibility
of fraud, the very thing the regulations were enacted to protect against in
the first place.9 Because lifting of the ban on general solicitation and
advertising effectively means companies can advertise that they are seeking
funds on all social media sites such as Facebook, Twitter, Reddit, etc.,
critics argue that the end result of having no real check on such content will
only open the public up to fraud, even if small businesses have access to
new investment capital.10
Others suggest that the JOBS Act is well intentioned but fails to
actually deliver on its promise.11 For instance, while Title II lifts the ban on
general solicitation and advertising, companies can only accept accredited
investors into their fundraising round.12 These critics argue that while on its
face this requirement seems reasonable and an answer to the above
criticism, the truth is that it can end up costing companies much more for
them to personally certify that the investors are indeed accredited, another
requirement that companies are expected to meet.13 This, together with the
harsh repercussions for failing to adhere to the requirements, means that
small businesses—the ones that the JOBS Act specifically targets—may
end up not partaking in the festivities.14
Proponents of the JOBS Act argue, however, that these harms may
6
See id.
See id.
8
Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1(2012). The Securities Act of 1933 is codified in its
modern form beginning at 15 U.S.C. § 77a. This paper will use both parallel citations for clarity and
precision.
9
Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and
Rule 144A Offerings, Securities Act Release No. 33-9415; No. 34-69959; No. IA-3624, Fed Sec. L. Rep
(CCH) ¶ 85,321 (Jul. 10, 2013)(codified as amended at 17 C.F.R. § 230.506 (2013)), available at
http://www.sec.gov/rules/final/2013/339415.pdf.
10
Tanya Prive, General Solicitation Ban Lifted Today- Three Things You Must Know About It,
FORBES (Sept. 23, 2013, 12:00AM), http://www.forbes.com/sites/tanyaaprive/2013/09/23/generalsolicitation-ban-lifted-today-three-things-you-must-about-it/.
11
C. Steven Bradford, The New Federal Crowdfunding Exemption: Promise Unfulfilled, 40 SEC.
REG. L.J. 195, 200 (2012).
12
17 C.F.R. § 230.506 (2013).
13
C. Stephen Bradford, An Argument for Self-Certification Under Rule 506(c) and the New
Crowdfunding
Exemption,
BUSINESS
LAW
PROF
BLOG
(Sept.
30,
2013),
http://lawprofessors.typepad.com/business_law/2013/09/an-argument.html.
14
Prive, supra note 10.
7
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not necessarily come to pass.15 First, the reduction in regulatory burdens is
not an altogether elimination of all safety nets.16 Pointing instead to Title
III, this group argues that through crowdfunding there will still be limits on
the amounts those investors, both accredited and nonaccredited, can invest,
ensuring a check on the market for fraud.17 Second, the general public, the
new “investors,” will only be allowed to invest their money through
preapproved broker-like platforms (portals) that the Securities and
Exchange Commission (SEC) clears.18 SEC approval is contingent on the
ability of these portals to properly screen the bids for solicitation that occur,
and, as a result, ought to be more than sufficient in ensuring the public’s
safety.19 The SEC recently proposed rules to help clarify many of these
issues.20
With so much debate back and forth, one thing is certain: the
impact of the JOBS Act, whether for better or worse, will only be revealed
in time. In the interim, however, this article argues that the JOBS Act is a
well-intended step forward for small businesses and, because it has the
potential to spur a boom of innovation with start-up enterprises, its benefits
significantly outweigh any potential harm of fraud, which will likely not
result anyway.
To begin with, Part II of this paper will provide an overview of the
securities requirements before the passage of the JOBS Act.21 Part III is a
review of the JOBS Act, specifically Title II and Title III, which directly
affect start-ups and their access to capital.22 This will include a conversation
showing how the JOBS Act aims to reduce regulatory burdens on startups.23 Part IV is a discussion of the critical arguments against the JOBS Act
and a rebuttal to them, ultimately showing the need for even more positive
reform as immediately as possible.24
II. SECURITIES REGULATIONS AND THE INTRODUCTION OF CROWDFUNDING
A. The Scope of Securities Registration
The starting point for any discussion in this field is, obviously, the
15
Larry Baker & Charlie Tribbet, New SEC Rules: Added Opportunities, Added Risks,
ENTREPRENEUR (Sept. 19, 2013), http://www.entrepreneur.com/article/228461#ixzz2hwtMzDvO.
16
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
17
17 C.F.R. § 230.506.
18
Securities Act of 1933 § 4(a)(6), 15 U.S.C. § 77d(a)(6) (2012).
19
Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
20
Rules Governing the Offer and Sale of Securities Through Crowdfunding Under Section 4(6) of the
Securities Act of 1933, 78 Fed. Reg. 66,427 (proposed Nov. 5, 2013), available at
https://www.federalregister.gov/articles/2013/11/05-2013-25355/crowdfunding.
21
See discussion infra Part II.
22
See discussion infra Part III.
23
See discussion infra id.
24
See discussion infra Parts IV, V.
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JOBS ACT
55
security interest. When it comes to the sale or purchase of securities, the
analysis is very binary: all such offers must either be registered, or there
must be an exemption.25 When discussing the scope of the JOBS Act, it
must be clear, then, what does and does not fall under its purview. In other
words, what is and is not a security for the purposes of the JOBS Act?
Section 2(a) of the Securities Act of 1933 (Securities Act) defines a
security.26 That definition, however, is a long laundry list of items that can
qualify as a “security.”27 Under § 2(a), all the classical notions of a security
(any note, stock, etc.) are encompassed, as well as the ever-present catchall,
“investment contract.”28 Established case law helps us understand the
definition more precisely. Essentially, a security can be broadly construed
as any instrument that gives the holder rights to dividends, grants voting
rights, can be negotiable, and appreciates in value over time.29 Defining a
security, however, is only half the process, however. Section 2(a) must be
read in conjunction with § 5(c) of the Securities Act in order to understand
the scope of securities regulation. While § 2(a) defines a security, § 5(c)
explains the significance of an instrument being a security, and the SEC’s
power over the security.30
Section 5(c) of the Securities Act mandates that any security being
offered for purchase or sale via interstate commerce must be registered.31
There are three important points: (1) the security must be offered in
“interstate commerce;” (2) more importantly, there must be an offer to
purchase or sell; and (3) most importantly, that offer must be a “public
offer.”32 It is important to note that the requirement that the transaction be a
“public” offering is not actually written in § 5.33 This qualification comes
into play through § 4(a)(2), which specifically exempts private offerings.34
In the famous Ralston Purina case, the Supreme Court clarified the notion
of conducting an offer of securities.35 In determining if an offering is a
public offering, the Court looked to factors surrounding the protection of
the investor.36 No single factor governed (such as the large number of
potential investors) and the Court looked to issues such as an investor’s
ability to access information vital to making a proper investment decision
and the sophistication of the investor.37 Ultimately, the Court determined
25
Jerry Chautin, Equity Crowdfunding is Set to Begin This Fall for Small Business Owners. Are You
Ready to Snag $1 Million?, HUFFINGTON POST, Aug.12, 2013, 9:53 AM),
http://www.huffingtonpost.com/jerry-chautin/equity-crowdfunding-is-se_b_3741060.html.
26
Securities Act of 1933 § 2(a)(1), 15 U.S.C. § 77b(a)(1) (2012).
27
Id.
28
Id.
29
See United Housing Found., Inc. v. Forman, 421 U.S. 837, 847 (1975).
30
Securities Act of 1933 §§ 2(a), 5(c), 15 U.S.C. §§ 77b(a), 77e(c).
31
Securities Act of 1933 § 5(c), 11 U.S.C. § 79e(c).
32
Securities Act of 1933 §§ 5(a)(1), (c), 15 U.S.C. §§ 77e(a)(1), (c).
33
Securities Act of 1933 §§ 5(a)(1), (c), 15 U.S.C. §§ 77e(a)(1), (c).
34
Securities Act of 1933 § 4(a)(2), 15 U.S.C. § 77d(a)(2).
35
See SEC v. Ralston Purina, 346 U.S. 119, 123 (1953).
36
Id. at 125-26.
37
Id.
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that the offering by Ralston Purina was indeed a public offering. 38
Henceforth, if it was determined that the targeted investors would need the
protection of the JOBS Act, the offering was considered a public offering,
and therefore needed be registered.39
So, if a company offers to sell securities, those securities are being
sold across state lines, and the investors offering to purchase those
securities need to have access to vital information in making sound
investment decisions, the offering will be a public offering of securities,
and those securities will have to be registered, unless an exemption
applies.40 When start-ups reach the stage of funding, traditional approaches
often include institutional investors, family and friends, sometimes banks,
and angel investors.41 In exchange for capital, the corporation issues the
investor stock in the business.42 In every one of these instances, if it is not a
donation, an offer to sell or purchase a security (stock) is occurring, and
again, those securities must be either registered with the SEC, or an
exemption must apply.43
B. Exemptions and the Introduction to Crowdfunding
Section 4 of the Securities Act provides a list of transactions that
are exempt from § 5’s registration requirements.44 While § 4 lists six
specific transactions that are exempt, other sections of the Securities Act
also provide certain exemptions. One of the most notable exemption is
§ 3(a)(11), which exempts purely intrastate offerings.45 Due to the nature of
the JOBS Act, the mechanisms of crowdfunding, and how small businesses
seek to raise capital through equity, we will primarily be concerned with § 4
and exempt transactions. 46
38
Id. at 125-27.
See Id. at 126 (holding that the focus of inquiry should be on the need of the offerees for the
protections afforded by registration); Lively v. Hirschfeld, 440 F.2d 631, 633 (10th Cir. 1971) (holding
that courts may examine the sophistication of the offerees in determining if they are persons in need of
protection); Hill York Corp v. Am. Int’l Franchises, Inc., 448 F.2d 680, 698 (5th Cir. 1971) (holding
that sophistication is not a substitute for information); SEC v. Cont’l Tobacco Co. 463 F.2d 137, 162
(5th Cir. 1972) (holding that alongside sophistication, investors must also have access to all information
material to the investment decision).
40
Securities Act of 1933 §§ 2(a)(1), 4(a)(2), 5(c), 15 U.S.C. §§ 77b(a), 77d(a)(2), 77e(c).
41
See infra Part II.B.1-2.
42
See infra Part II.B.1-2.
43
See infra Part II.B.1-2.
44
Securities Act of 1933 § 4, 15 U.S.C. § 77d.
45
Securities Act of 1933 § 3(a)(11), 15 U.S.C. § 77(c)(11).
46
It will be highly unlikely that such fundraising as discussed in this article will be limited to
investors residing in the same state entirely. Online Crowdsourcing in general is exactly that—online,
and therefore easily traverses state lines. Consequently, the intrastate exemption provided by §4 (a)(1) of
the Securities Act, will likely not apply.
39
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1. The Private Offering Exemption and Regulation D
In the small business setting, the same transactions described above
can also be prime candidates for exemptions from the expensive and
stringent registration requirements.47 Chief among these exceptions, and
one of the six in § 4, is the obvious: the offer to sell is simply not a public
offering, it is a private offering under § 4(a)(2).48 As mentioned, in order to
fall under the scope of § 5 and the registration requirements, the offer must
be public. 49 The language of § 4(a)(2) expressly creates an exemption for
private offerings.50 Without a public offering, the transaction would not be
covered by § 5 of the Securities Act, thus, registration would not be
required.51
As briefly touched upon above, the Ralston case suggests that an
offer could be considered public based on a number of factors. 52 Common
sense suggests that the most outcome determinative factor would seem the
number of investors purchasing the securities. If a small group of
individuals get together to invest in a local venture, perhaps a local
restaurant, it could hardly be considered a public offering.53 Yet, Ralston
also clearly states that the designation does not hinge on one single factor
but, instead, requires a broader approach.54 The question is whether these
investors need the protection of the Securities Act.55 Their level of
sophistication and their access to information vital to making sound
investment decisions are all critically relevant factors in making this
determination.56 Thus, the small number of people investing in their
neighborhood family restaurant—probably having easy access to vital
information and being well prepared to make an investment in their own
backyard—could be considered as participants in a private offering, exempt
from the Securities Act. 57 The rationale is solid; these investors do not
require the protection of the Securities Act.58 For small businesses wishing
to distribute equity for capital, this is would seem to be the most useful
exemption.59
Historically, however, Ralston and its immediate progeny had a
chilling effect on securities transactions.60 Afraid of being found in
47
See id.
Securities Act of 1933 § 4(a)(2), 15 U.S.C. § 77d(a)(2).
49
See discussion supra Part II.A.
50
Securities Act of 1933 § 4(a)(2), (6), 15 U.S.C. § 77d(a)(2), (6).
51
See discussion supra Part II.A.
52
See SEC v. Ralston, 346 U.S. 119, 124 (1953).
53
See id. at 125.
54
See id. at 126.
55
See id.
56
See id. at 125-27.
57
See id.
58
See id. at 127.
59
See id. at 126-27.
60
Warran, Manning Gilbert III, A Review of Regulation D: The Present Exemption Regimen for
Limited Offerings under the Securities Act of 1933, 33 AM. U. L. REV. 355, 355-59 (1984).
48
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violation of the Securities Act and its registration requirements by being
involved in a public offering, the market’s willingness to raise capital in
this manner was effectively slowed, or chilled—a negative, unintended
consequence of the Supreme Court’s holding in Ralston.61 In response, the
SEC adopted Regulation D (Reg. D) in the early 1980’s.62 In an effort to
help small companies access capital markets that they could not reach due
to the registration requirements of § 5 (or refused to even consider because
of the fear of being in violation), Reg. D offers three very specific safe
harbor exemptions: if the transaction falls under Rules 504, 505, or 506, the
transaction is a private offering.63
The three safe harbor exemptions work as a bit of a sliding scale.
On the scale, Rule 504 has the least amount of restrictions but caps the fund
raising to $1 million, while Rule 506 has the most restrictions but has no
limit on the amount that may be raised.64 Each rule has its own specific
requirements, such as the number of investors allowed, solicitation and
advertising rules, disclosure obligations, resale restrictions or allowances,
and the level of sophistication of the investors (accredited or nonaccredited).65 Effectively, Reg. D (mostly Rule 506) makes up what is
commonly known as the “non-exclusive safe harbor for private offerings,”
making it closely related, if not directly linked to § 4(a)(2) and the private
offering exemption.66 In adopting Reg. D, the SEC properly gave the
private offering exemption its true potential, and therefore, small businesses
working to raise capital through equity now typically fit here.67
2. Donation Crowdfunding—The Way Around
Another method of avoiding securities regulations is to raise funds
without offering to sell or purchase securities. Companies can simply raise
funds through donations or other mechanisms of raising capital such as
prepurchase sales.68 Consequently, if securities are not involved, there is
nothing to regulate. Relevant to this discussion, and when applying these
mechanisms to crowdfunding, an entirely new term of art is born: Donation
crowdfunding.69 It is important to note that internet-based crowdfunding is
a fairly recent innovation, with the world’s leading crowdfunding site
launching in 2005, and the term “crowdfunding” only appearing in late
61
Id at 355-56.
Id at 355-59.
63
See id.
64
See id. at 355-59.
65
See infra discussion Part III.C. It is also important to note that each Reg. D rule, pre-JOBS Act, has
a specific ban on general solicitation and advertising—if a company intended to use one of these safe
harbors, the company could not engage in public advertising or general solicitation. This is done via rule
502. Id.
66
See Warran, supra note 60, at 358.
67
Id. at 355-59.
68
See infra note 73.
69
Id.
62
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2006.70 Most crowdfunding sites allow for what is known as “donation
crowdfunding,” as opposed to “equity crowdfunding.” 71 The distinction is
paramount because equity crowdfunding is a concern of securities
regulation and what the JOBS Act seeks to address, while the former is not
even within the scope of securities regulation.72
A prime example of donation crowdfunding is kickstarter.com.73
Launched in 2009, Kickstarter is a website that allows the crowdfunding of
specific projects through donations and prepurchase sales.74 Once a project
on Kickstarter gets approved to go “live” for funding, the general public
can choose to donate or to contribute funds in exchange for rewards if they
believe in the project.75 The creators of a project must set a fundraising
goal, and they get funded only if the project can meet that goal within the
allotted time.76 Typical projects include a wide variety of innovative
concepts—art galleries, publishing endeavors, prototype electronics, music
or film groups, etc.77 One of the most successful projects to date was the
Pebble E-Paper Watch, a design prototype for a customizable watch that
syncs with a user’s smartphone.78 The project had set a goal of $100,000
but ended up getting funded for well over $10 million, with nearly 70,000
contributors.79 Such success is positive sign for the potential of
crowdfunding.
In all such projects on kickstarter.com, people can contribute in
different tiers or levels.80 For example, a contributor can make a simple
heartfelt donation of a few dollars and receive nothing in return except the
feeling good for contributing to something they believe in. Alternatively, a
contributor can contribute $500, and the contributor may receive a reward
in return from the creators, such as a signed copy of the album of a new
band, or one of the first products off the shelf once it is to be manufactured
after funding.81
With the E-Paper watch, one person made a contribution, or
“pledge,” of $1 and received nothing in return, while someone else made a
pledge of $99, which served as a pre-purchase order and the contributor
was promised a watch once the project was funded and developed.82 That
70
See Bradford, supra note 11, at 196.
Id. at 197.
72
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
73
Kickstarter.com 2013, KICKSTARTER, INC. www.kickstarter.com
74
See id.
75
See id.
76
See id.
77
See id.
78
Pebble Technology Project Page, Pebble: E-Paper Watch for iPhone and Android, KICKSTARTER
(last visited Feb., 13, 2014), http://www.kickstarter.com/projects /597507018/pebble-e-paper-watch-foriphone-and-android (Pebble: E-Paper Watch Sucessfully raised its funding goal on May 18, 2012).
79
Id.
80
See supra note 73.
81
See id.
82
See id.
71
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project also included the option for the highest tier of donation at $10,000,
in which a contributor would receive one hundred watches.83 Thirty-one
people pledged in that tier, while over 2,600 people pledged just a dollar,
and the rest fell somewhere in between.84 As all of these transactions are
treated as either donations or pre-purchase sales; they effectively fall
outside the scope of securities regulations because no securities are being
offered for sale or purchase.85 It is not to say that these transactions are
exempt, but rather, they simply are not within the purview of the Securities
Act.86
By contrast, instead of simply receiving donations or giving
rewards or pre-purchases in return for funding, equity crowdfunding allows
companies to give people equity or stake in the company in exchange for
their contribution, effectively making them investors in the new venture.87
Examples of equity crowdfunding sites include Bolstr.com, AngelList.com,
and CircleUp.com.88 These sites and many others are only now able to
begin operating effectively, post-JOBS Act.89 The basic idea is simple;
similar to donation crowdfunding, except instead of receiving rewards or
other items in return, the contributor receives stock or other forms of
securities in the company itself.90
Equity crowdfunding would not seem to fit squarely within any of
the current exemptions.91 It is a clear transaction of securities being
purchased and sold, and it is likely not to be considered a private offering
given the sheer number of potential investors as well as the fact that the
investors are most likely unaccredited or unsophisticated investors in need
of protection of the Securities Act.92 It is also not likely to fit into any Reg.
D safe harbors due to the limits on the number of investors as well as the
necessary accreditation status of many of them.93 The solution, it would
seem, is Title III of the JOBS Act and the addition of § 4(a)(6), creating the
exemption for exactly this setting.94
83
See id.
See id.
85
Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
86
See id.
87
See Baker & Tribbet, supra note 15.
88
Id.
89
Id.
90
Id.
91
See infra notes 92-93 and accompanying texts.
92
See Securities Act of 1933 §§ 1-4, U.S.C. §§ 77a-77d .
93
See 17 C.F.R. 230.500-.508.
94
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012); also
Securities Act of 1933 § 4(a)(6), 15 U.S.C. § 77d(a)(6).
84
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C. The Specific Ban on General Solicitation and Advertisement and its
Rationale
The last piece of background regulation that must be addressed is
Rule 502(c) and the SEC’s ban on general solicitation and advertising in all
Reg. D private placements.95 As discussed above, small businesses wishing
to raise capital through equity will typically be exempt from § 5 of the
Securities Act and the registration requirements by holding a private
offering under §4 (a)(2).96 These companies will be able to take advantage
of § (4)(a)(2) through the safe harbors under Reg. D.97 Yet, under Reg. D,
these companies are specifically banned from publically advertising that
they are seeking funds and, therefore, cannot solicit funds in a general
manner.98 Rule 502(c) is grounded in the notion that investors need
protection from fraud—the very reason for the passage of the Securities Act
and the formation of the SEC in the first place.99
For exempt transactions, such as private offerings, dissemination of
material information with regards to investment opportunities is not subject
to the proper validation of the Securities Act. There is no registration
requirement and, thus, no formal process by which the information is
flowing.100 While some of the Reg. D rules require the disclosure of
material information to non-accredited investors, there is nothing in place to
serve as a check against giving fraudulent information to the public at
large.101 Consequently, the SEC sought to introduce a blanket ban on the
use of general solicitation and advertising for all of these exempt Reg. D
placements.102 In other words, companies seeking to use the Reg. D safe
harbors may not publically advertise that they are seeking investments, nor
may they solicit investments generally.103 Logic follows that allowing
access to capital markets for these small businesses is wonderful, but the
protection of the investor/purchaser is the paramount concern.
One might argue that Rule 502(c) is aimed at protecting the
unaccredited investor, the investor without the proper acumen and ability to
make informed business investments, and would, therefore, be susceptible
to fraud.104 Does the accredited investor, who is routinely engaged in these
95
See Securities Act of 1933 § 4(a)(6), 15 U.S.C. §77d(a)(6) (2012); also 17 C.F.R. §§ 230.144A,
.502,.506 (rule 502 also applies to R. 144A offerings. Rule 144A is a safe harbor for the resale of certain
restricted securities, and are not particularly at issue with regards to the scope of this discussion. The
resale of securities through crowdfunding, however, may indeed become an issue worth visiting at some
point in the future, though for now § 4(a)(6) expressly bans resale).
96
See discussion supra Part II.B.1
97
See 17 C.F.R. §§ 230.500-.508.
98
Id. § 230.502(c).
99
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1.
100
Id.
101
See 17 C.F.R. § 230.506.
102
See id. § 230.502; also Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1.
103
See 17 C.F.R. § 230.502(a).
104
See id. § 230.502(c).
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types of investments, really require such protection? The JOBS Act seems
to recognize this idea under Title II and provides for an adequate remedy
while still maintaining the protection for those that need protecting.105
III. THE JOBS ACT TITLE II AND III
In its broadest sense, the JOBS Act represents an attempt at
balancing the competing claims of progress and growth opportunities for
small businesses and startups and the ever-present need to protect investors
from fraud.106 Seen through this perspective, the JOBS Act should be
applauded for its conscious step forward despite what some critics might
have to say about its efficacy. While the JOBS Act has multiple titles, Titles
II and III are the most significant to answer the questions in this paper.107
Title II is a lift of the ban on general solicitation and advertising, and Title
III is the exemption specifically added for equity crowdfunding.108
A. A (Very) Brief Legislative History
Sometime around November 2011, both the U.S. House of
Representatives and the Senate were drafting multiple bills of a very similar
nature, at least three of which were geared specifically at crowdfunding.109
A few months prior, the Obama Administration had already publically
signaled its support of a crowdfunding exemption to the securities laws,
citing the potential for serious job-creation (pun probably intended).110 As a
result, the time seemed ripe to consolidate and act. Surprisingly fast for
congress, in March 2012, the House first passed the JOBS Act, which
incorporated the initial crowdfunding proposals (with a few minor
revisions) as well as other provisions dealing with companies and capital
markets.111
The Senate was quick to follow suit, and after some rather swift
back and forth revisions between the House and the Senate, the House
accepted and passed a last amendment offered by the Senate on March 27,
2012, by a vote of 380-41.112 The JOBS Act now included several different
provisions geared towards the opening of new “emerging” capital markets,
and it also included the lift on the ban of general solicitation and advertising
105
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
See id.
107
See id. at § 201.
108
See id.
109
See Entrepreneur Access to Capital Act, H.R. 2930, 112th Cong. (as passed by House, Nov. 3,
2011).
110
See Executive Office of the President, Statement of Administration Policy (Nov. 2, 2011),
available at www.whitehouse.gov/sites/default/les/omb/legislative/sap/112/
saphr2930r20111102.pdf
111
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
112
See 158 Cong. Rec. H1598 (daily ed. Mar. 27, 2012).
106
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JOBS ACT
63
now known as Title II, as well as the crowdfunding exemption known as
Title III.113 Shortly after, on April 5, 2012, President Obama signed the
JOBS Act, officially making it Public Law Number 112-106.114
B. Title II
Title II of the JOBS Act mandates the lift of the ban on general
solicitation and advertising in Reg. D private placement offerings.115 Again,
small businesses and startups wishing to fall under the private offering
exemption of § 4(a)(2) would do so through Reg. D.116 After a serious delay
by the SEC in promulgating its rules to meet this mandate, on September
23, 2013, the SEC finally adopted Rule 506(c).117 Rule 506(c) officially
allows companies to “publically advertise that they are seeking
investments” and solicit investments from the general public while pursuing
a private offering under Reg. D.118
The scope of this change is rather significant. As the language
reads, private companies publically advertising that they are actively
seeking investments can now communicate this message via mass media
communication, both traditionally and online.119 This effectively includes
social media such as Facebook, Twitter, Linkedin, Reddit, and others.120
Essentially, anything that involves communicating information regarding
investment opportunities in private companies to a large audience who may
or may not be accredited is now allowed.121
The new addition of subparagraph (c) to Rule 506 creates a huge
new opportunity but also introduces new requirements that must be met in
order to meet this safe harbor.122 Specifically, the language states that while
the issuer may advertise and solicit publically, the issuer may only accept
accredited investors into the fundraising round.123 This requirement has a
tremendous impact.
First, as it stands, pre-JOBS Act, Rule 506 allowed up to thirty-five
non-accredited investors to participate in the fundraising round. But by
engaging in a 506(c) offering, i.e. once the issuer begins advertising
publically and soliciting generally, the issuer loses that option to accept any
non-accredited investors under a regular 506(a) offering and can only
accept accredited investors, thus, classifying the offering as a 506(c)
113
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
See id.
115
See id.
116
See 17 C.F.R. § 230.504-.506; also Securities Act of 1933 § 4(a)(2), 15 U.S.C. § 77d(a)(2).
117
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1.
118
Prive, supra note 10.
119
See 17 C.F.R. § 230.506(c).
120
See id.
121
See Prive, supra note 10.
122
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1.
123
See id.
114
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offering.124
Second, under Rule 506(c)(2), the burden to verify that investors
are accredited falls on the issuer, and the issuer must take “reasonable
steps” to verify that the investor is accredited.125 The statute includes a
nonexhaustive list of those steps.126 For example, the issuer may rely on
written representations from registered broker-dealers, investment advisors,
licensed attorneys, or may conduct the verification process itself by
reviewing tax filings of the investor, bank statements, credit reports,
appraisal reports, etc.127 Additionally, the rule includes a nonexhaustive list
of three factors that the issuer can use in determining the “reasonableness”
of steps taken: (1) the nature of the purchaser, including the category of
accredited investor that the purchaser claims to satisfy; (2) the amount and
type of information that is available to the issuer about the purchaser; and
(3) the nature of the offering, including the manner in which investors were
solicited and the terms of the investment.128 Again, these lists are
nonexhaustive, but the burden lies squarely on the issuer to certify that each
investor is accredited.129
Third, the SEC makes clear that a Rule 506(c) offering is exclusive
under the Reg. D safe harbor Rule 506 and does not apply to all other
§ 4(a)(2) private offerings.130 Though they may still be able to conduct
other private offerings, companies falling outside the Reg. D safe harbor
will be unable to take advantage of Rule 506(c) and will still be barred from
general solicitation and advertising.131 Fourth and finally, the issuer must
declare that its offering was a publically advertised offering.132 This is
accomplish by filing a new form, form D, within fifteen days of receiving
the initial investment.133
It must also be understood that the use of Rule 506(c) may come
with very heavy consequences for potential violations. Keeping in mind
that Rule 506(c) only applies to issuers under the Reg. D safe harbor of 506,
an issuer might still be out of luck if there is a determination that the
offering falls within § 4(a)(2) but outside of Reg. D.134 Such a failure would
be a violation of § 5 of the Securities Act, and could have disastrous
consequences for small businesses and start-ups, e.g., a one-year ban on
fundraising.135 A one-year ban on fundraising amounts to a death penalty
124
See id.; also Prive, supra note 10.
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1; see also Bradford, supra note 13.
126
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1
127
See id.
128
See id.
129
See id.
130
See id.
131
See id.
132
See id.
133
Id.
134
See Securities Act of 1933 §§ 4(a)(2), 4A, 15 U.S.C. §§ 77d(a)(2), 77d-1.
135
See Securities Act of 1933 §§ 4A, 5 15 U.S.C. §§ 77d-1, 77e.
125
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JOBS ACT
65
for start-ups and small businesses.136
In sum, if a company wanting to raise capital through the sale of
equity does so via a § 4(a)(2) private offering, and qualifies under the Reg.
D safe harbor Rule 506, that company has a choice to make: it can either
conduct a regular Rule 506(b) offering, allowing it to sell to up to thirtyfive non-accredited investors (as well as an unlimited number of accredited
investors) but stay subject to the ban on general advertising and soliciting,
or the company can chose to make an offering under R. 506(c), in which
case the company can advertise publically that it is seeking investments but
may only accept investments from purchasers that the issuer certifies as
being accredited investors.137
C. Title III
Title III of the JOBS Act creates a new exemption by way of
adding § 4(a)(6) to the Securities Act.138 In late October 2013, the SEC
followed up with proposed rulemaking to carry out the statutory
guidance.139 Section 4(a)(6) is now the new crowdfunding exemption to the
registration requirements of § 5.140 As an overview, § 4(a)(6) allows for
equity crowdfunding with the following limitations: (1) there is a $1 million
limit on the aggregate amount to be raised in reliance of this exemption; (2)
there is a limit on the amount each investor may invest; (3) the offering
must be conducted solely through an intermediary “portal” that is approved
by the SEC; and (4) the issuer, intermediary, and purchaser must comply
with additional requirements coming from both the JOBS Act and the
SEC.141 The new proposed rule clears up many ambiguities and unclear
provisions of the statute itself and leads to a more cohesive crowdfunding
exemption that seems, at least for the time being, workable.142
First, § 4(a)(6) limits the aggregate amount that a company/issuer
may sell under this exemption within a twelve-month period to $1
million.143 One of the feared ambiguities of the statutory language in the
JOBS Act was the scope of the word “aggregate” and whether this cap
included all securities sold or just simply securities sold pursuant to this
exemption.144 In recognizing this potential ambiguity, the SEC’s seeks to
restrict this limitation only to securities sold pursuant to § 4(a)(6) with
proposed Rule 100(a)(1).145 In other words, only securities sold through
136
See Prive, supra note 10.
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1.
138
See id.
139
See id.
140
See id.
141
Securities Act of 1933 § 4(a)(6), 15 U.S.C. § 77d(a)(6).
142
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
143
Securities Act of 1933 § 4(a)(6), 15 U.S.C. § 77d(a)(6)(A).
144
See Bradford, supra note 11.
145
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
137
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equity crowdfunding (i.e. this exemption) will be capped at $1 million
dollars.146 Securities sold concurrently pursuant to other exemptions will
not be counted towards this cap—a good thing for businesses.147
The implication is that the SEC’s rule allows for issuers to escape
the unfortunate possibility of integration by allowing concurrent offerings
through different exemptions.148 Here, the SEC’s proposed rule goes on to
explicitly declare that offerings conducted pursuant to § 4(a)(6) will not be
integrated with other simultaneous private offerings.149 This is of course
provided that all other offerings conducted under other exemptions meet the
requirements of those exemptions as well.150 A company is free to use
§ 4(a)(6) as well as multiple other exemptions in raising capital, and only
the crowdfunding offering will be limited to $1 million.151
The second condition to § 4(a)(6) is a limit on the amount any
investor may invest in a single offering.152 This amount is based on the net
worth and annual income of the investor.153 In this regard, the SEC requires
use of the rules concerning calculations of accredited investors.154
Essentially, it breaks down as follows: if the investor’s net worth and
annual income is less than $100,000, the limit that investor may invest with
a single issuer is the greater of $2,000, or five percent of the investor’s
annual income or net worth; or, if the investor’s net worth and annual
income is greater than or equal to $100,000, the limit that investor may
invest with a single issuer is ten percent of that investor’s annual income or
net worth, subject to a maximum of $100,000.155 Similarly, this provision of
the statute was subject to considerable ambiguity, cleared up by Proposed
Rule 100(a)(2), simply making these calculations a bit more clear.156
The third requirement § 4(a)(6) imposes is the securities must be
146
See id.
See id.
148
See Perry E. Wallace, Integration of Securities Offerings: Obstacles to Capital Formation Remain
for Small Businesses, 45 WASH. & LEE L. REV. 936–37 (1988) (the integration doctrine seeks to counter
abuses in the registration requirements that have the potential to defraud investors. The fear is that an
issuer may try and take advantage of the system by dividing what is essentially one offering into many
smaller groups of offerings in order to meet exemption requirements. When this happens, the SEC may
declare all of those offerings to be integrated. The doctrine provides that the SEC may deem separate
offerings of securities to different groups as one offering, thereby forcing the issuer to assure that all
securities sold meet the requirements of all the exemptions being claimed- integrating multiple different
private offering exemptions into one offering).
149
See id.
150
See id.
151
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
152
Securities Act of 1933 § 4(a)(6)(B), 15 U.S.C. § 77d(a)(6)(B).
153
Id.
154
Id.
155
Securities Act of 1933 § 4(a)(6)(B)(i)-(ii), 15 U.S.C. § 77d(a)(6)(B)(i)-(ii).
156
See generally C. Steven Bradford, Crowdfunding Rules Clear Up JOBS Act Ambiguities and
Loopholes,
BUSINESS
LAW
PROF
BLOG
(Oct.
28,
2013),
http://lawprofessors.typepad.com/business_law/2013/10/crowdfunding-rules-clear-up-jobs-actambiguities-and-loopholes.html (providing details on this issue).
147
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JOBS ACT
67
sold through an intermediary that serves as a “broker-portal,” e.g. a site that
is approved by the SEC specifically for equity crowdfunding.157 Approval
of the SEC is based on compliance with § 4A(a) of the Securities Act.158
Among other things, the broker-portal will need to register with the SEC
and be required to oversee the entire process of the crowdfunding offering,
including enforcing issuer disclosure obligations and investor capital
access.159 Interesting to note is the new category of “funding portal” as
distinct from “broker.”160 The title is a new creation of the statute and is
defined as “any person acting as an intermediary in a transaction involving
the offer or sale of securities . . . solely pursuant to § 4(a)(6).”161 Examples
include Bolstr.com, AngelList.com, and CircleUp.com.162
There are numerous additional requirements on the issuer,
purchaser, and the funding portal that are the subject of much debate as the
SEC, in releasing its Proposed Rules, has requested official comments.163
For instance, the issuer has affirmative disclosure requirements, and the
intermediary has an obligation to oversee that process.164 The purchaser
also has an obligation to review what is known as “investor
understanding/education information,” demonstrating their understanding
of risks and other matters.165 One other important clarification brought by
the proposed rules is the notion of “self-certification” of investors with
regards to investor limits.166 Recognizing the substantial burden that would
fall upon the issuer and the intermediary in vetting potential investors from
a massive crowd, Proposed Rule 303(b)(1) allows the intermediary portal to
rely on the investor’s representations regarding net worth and annual
income, effectively placing the burden on the investor for compliance.167
As it relates, the SEC has also seen fit to include a “substantial
compliance” rule similar to that offered under Reg. D offerings, where an
insignificant failure coupled with a “good faith” effort will not result in the
loss of the exemption based on a few specifically spelled out
requirements.168 This is a positive incentive for small companies to use the
157
Id.
See Bradford, supra note 11.
159
Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
160
See id.
161
Id.
162
See Bolstr, http://www.bolstr.com (last visited Feb. 18, 2014); Angel List,
http://www.AngelList.com (last visited Feb. 18, 2014); CircleUp, http://www.CircleUp.com (last visited
Feb. 18, 2014).
163
See Bradford, supra note 11.
164
See id.
165
Id. at 206.
166
C. Stephen Bradford, Four Things I Like About the Proposed Crowdfunding Rules, BUSINESS LAW
PROF BLOG (November 4, 2013), http://lawprofessors.typepad.com/business_law/2013/11/four-things-ilike-about-the-proposed-crowdfunding-rules.html.
167
See id. (note that this is not the case under a 506(c) offering. See Part III for further discussion).
168
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
158
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exemption.169
Yet, the most significant addition to the statute by way of the
proposed rules is the regulation of advertising and solicitation with regards
to crowdfunding offerings.170 In beginning this article, it was my hope to
advocate a relaxed approach to advertising crowdfunding offerings.171
During the months that passed, however, it seems the SEC decided to agree
by proposing the new rules.172 Under the statute, issuers seemed to be
prohibited from advertising anything other than the fact that a
crowdfunding offering was being made, and to point potential purchasers
towards the funding portal conducting the offering.173 The proposed rules
make it clear, however, that the issuer is only restricted with regards to the
terms of the offering—quite an important distinction.174 The ambiguity in
the statute raised a preposterous restriction; how can a company crowdfund
if it could not advertise to the crowd?175 The SEC explicitly recognized this
concern and allowed for a company to freely advertise even over social
media platforms.176 The only restriction in place is with regards to the terms
of the offering. The issuer is only permitted to advertise specific details
regarding the terms (e.g., factual information about the business), the price
of the securities, the closing date of the offering, etc..177 The SEC strongly
believes in the importance of the crowd in crowdfunding and will not seek
to restrict the issuer from communicating with the crowd any more than
necessary under this exemption.178
In conjunction with this issue, is Proposed Rule 303(c), which
requires intermediaries to provide a communication channel between
potential investors and the issuer and to be accessible by the general
public.179 The aim is to facilitate communication between the issuer and
potential investor about the details of the offering thereby increasing the
flow of information leading to good, sound investment decisions.180 After
all, crowdfunding is about the crowd. Let the crowd decide what will be
successful—empower them to do so.181
169
See id.
See id.
171
See id.
172
See id.
173
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
174
Id.
175
Id.
176
Id.
177
See id.
178
Id.
179
See id.
180
See id.
181
See Bradford, supra note 166.
170
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JOBS ACT
69
IV. A WELL-INTENDED STEP FORWARD?
The opening up of the general public as a new emerging capital
market should be seen as an astounding feat. Since its inception,
kickstarter.com has had more than five million people help fund over
50,000 projects, collectively raising over $700 million in funding, making it
one of the most successful crowdfunding portals to date.182 And that is just
the beginning. For starters, Kickstarter is all donation crowdfunding, and it
is only one of over twenty-five.183 Once equity crowdfunding properly takes
off, this number is subject to serious upward revision.
The crowdfunding Industry Report, by Massolution, through its
initiative crowdsourcing.org, a major non-profit source for crowdfunding
statistics, stated that in 2012 the entire industry raised over $2.7 billion
spanning over a million campaigns, with projections for 2013 closer to $5
billion—an estimated increase of 81%.184 It is not difficult to see the
massive potential. It is also important to recognize that a majority of this
success comes at a time where equity crowdfunding is not even in fullform. Once the SEC finalizes its rules, these numbers are bound to increase,
as people will be much more likely to crowdfund an idea they believe in if
also offered the chance to be a part of it.
It is for these reasons that the JOBS Act must be seen as a wellintended. Every one of its provisions, namely Title II and Title III discussed
here, is aimed at prying open the door to this new and emerging capital
market, whose potential is near limitless.185 Its efficacy, however, has come
under some scrutiny, and such criticism is not without its merit. The
Securities Act was designed with the protection of the investing public in
mind.186 Restrictions, regulations, and consequences, all of these
mechanisms are in place to deter fraud and ensure a transparent and fair
market place.187 The JOBS Act, while seeking to open new potential, must
also fit within this framework, and I contend that not only is it well
intended, but it is also a step forward.
Criticisms of the JOBS Act fall under two main headings: (1) the
JOBS Act goes too far in lessening certain restrictions and is, therefore,
subjecting the market to serious fraud; or (2) the JOBS Act does not go far
enough to deliver on its promised intent and, instead, can only hinder small
businesses and start-ups.
Designed to prevent fraud and harm to potential investors, Rule
182
Public
Statistics,
KICKSTARTER,
INC.,
(last
visited
Nov.
25,
2013),
http://www.kickstarter.com/help/stats?ref=footer.
183
See id.
184
Chance Barnett, Top 10 Crowdfunding Sites For Fundraising, FORBES (May 8, 2013, 9:00 AM),
http://www.forbes.com/sites/chancebarnett/2013/05/08/top-10-crowdfunding-sites-for-fundraising/.
185
See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
186
See generally Securities Act of 1933.
187
Id.
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502(c)’s ban on general solicitation and advertising was well reasoned.188 If
a transaction involving securities is exempt from the registration
requirements of § 5 and affirmative disclosure requirements relaxed, there
is no concrete or effective check on the content that companies can
disseminate with regards to the selling of their securities.189 Critics,
therefore, might have a point in arguing that lifting the ban with Rule
506(c) is a terrible idea.190 Letting companies market to the “whole world”
that they are seeking investments for a “private” offering, especially in
today’s age of social networking and media, is not only counterintuitive,
but also reckless.191 According to some scholars, the only long-term effect
of such an action is fraud on the market.192 The SEC’s response seems to be
the requirement that only accredited investors may be allowed to actually
participate.193 If companies want to solicit and advertise publically to all
individuals, accredited or not, then, at the very least, only persons with the
financial acumen and investment know-how ought to be allowed to
participate for their own protection.194
This same criticism and fear surrounds the crowdfunding
exemption, and this time there is not even an accreditation status
requirement.195 Are we going to allow issuers to sell directly to the general,
nonaccredited public without having the issuer register the offering?196 One
of the most notable examples, albeit about donation crowdfunding, was a
fake start-up company soliciting funds through kickstarter.com in June
2013.197 The company, Kobe Red, was purportedly raising funds for a new,
“100% Japanese Beer Fed Kobe Beef Jerky,” and was almost funded for
$120,000 before kickstarter.com caught on and pulled the plug.198 Many
critics of crowdfunding in general see this for what it is—the “wild west” of
start-up fundraising.199 Untamed, and with no checks and balances, there is
no good way to ensure investor protection.
In one sense, there is a point to be made. In another, however, such
surface level observation does no justice to the issue. The Kobe Red
scandal was a donation crowdfunding effort, not subject to the SEC
anyway, and (probably not the best argument) kickstarter.com was able to
step in and stop the fraud in time to prevent serious harm due to its own
188
17 C.F.R. § 230.502(c).
See Securities Act of 1933 § 5, 15 U.S.C. § 77e.
190
Brian Korn, The Trouble With Crowdfunding, FORBES (Apr.17, 2013, 2:59 PM),
http://www.forbes.com/sites/deborahljacobs/2013/04/17/the-trouble-with-crowdfunding/.
191
See id.
192
Id.
193
See 17 C.F.R. § 230.506.
194
See Korn, supra note 190 and accomplanying text.
195
See infra, notes 200-203 and accompanying text.
196
See Korn, supra note 190.
197
Emily Patterson, Crowdfunding Sites Grapple with Fraud, BETTER BUSINESS BUREAU (Jun. 21,
2013), http://www.bbb.org/blog/2013/06/crowdfunding-sites-grapple-with-fraud/.
198
Id.
199
Id.
189
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JOBS ACT
71
internal security measures.200 With the new proposed rules regarding equity
crowdfunding, the SEC has had ample time to debate these issues and is
offering requirements that strike that delicate balance that is needed.201
First, it is important to keep in mind that all equity crowdfunding offerings
must be conducted via approved intermediary funding portals.202 These
portals are designed to serve as regulators of the system, allowing for open
communication, but also performing safeguard functions.203 Second, the
issuer, though it may not need to register the offering, still has affirmative
disclosure requirements, and stringent penalties for fraud—a full year ban
on fundraising is effectively a death sentence for any new start-up or small
business venture.204 The potential for fraud seems minute, given this
backdrop.
Alternatively, critics on the other end of the spectrum argue that the
regulations are simply too burdensome, and, therefore, the promise of the
JOBS Act may be “unfulfilled.”205 Specifically, with the 506(c) offering,
the rules also state that the onus of certifying the accredited status of an
investor lies on the issuer.206 Noted legal scholar C. Steven Bradford,
Distinguished Professor of Law at the University of Nebraska-Lincoln
College of Law makes the argument that this requirement will simply
“increase the cost of using the exemption,” among other problems.207
Paying for the time and resources necessary to properly vet and verify
potential investors in this manner is seriously burdensome.208 By increasing
the cost on the issuer, it does not make using this exemption worthwhile
and, therefore, fails to uphold the intent of the Rule—capturing the
potential of the public as a new capital market.209
Bradford proposes an alternative that arguably solves both the
problems of maintaining the protection for unwary investors while also
making it a useful exception for issuers.210 Bradford argues for selfcertification under Rule 506(c).211 In essence, Bradford asks why the issuer
ought to be held responsible if the investor, to whom the protection is meant
200
Kickstarter.com
Kobe
Red
Project
Page,
KICKSTARTER,
INC.),
http://www.kickstarter.com/projects/kobered/kobe-red-100-japanese-beer-fed-kobe-beef-jerky
(last
visited Feb, 18, 2014) (Kobe Red Project suspended by Kickstarter, Inc.).
201
See Korn, supra note 190.
202
Securities Act of 1933 § 4(a)(6), 15 U.S.C. § 77d(a)(6)(C).
203
See Korn, supra note 190.
204
Securities Act of 1933 § 4(a)(6), 15 U.S.C. § 77d(a)(6).
205
See Bradford, supra notes 11, 13 (this phrase is referring to C. Steven Bradford’s article, “Promise
Unfulfilled,” regarding the efficacy of the Crowdfunding Exemption in the JOBS Act. After the release
of the SEC’s Proposed Rules on the subject, Bradford has written blog posts indicating his agreement
with the SEC’s positive rulemaking in alleviating many of the harms brought by ambiguities in the
statute).
206
See 17 C.F.R. § 230.506.
207
Bradford, supra note 13.
208
Id.
209
Id.
210
Id.
211
Id.
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to extend, wishes to lie about his accredited status in the first place?212 This
would still leave the requirement of having only accredited investors
participate intact but would also have the added benefit of not punishing an
innocent company that is giving full effort to comply with the rules and
raise funding only to be lied to by the investor who “needs the protection of
the act.”213 It is important to note that as mentioned above, this idea has
already taken root with regards to the crowdfunding exemption, where the
SEC itself has proposed self-certification for investors purchasing through
intermediaries.214 Why not here as well?
An argument for the SEC is that the interest of justice requires that
the rules be followed, and the simple answer is that while Bradford’s
suggestion is sound, the issuer is in the best place to enforce the rules
because the issuer is the easiest to hold accountable—they have the most to
lose.215 This argument is predicated, however, upon the assumption that
rampant fraud will be an issue on the public scene because the unaccredited
investor will be trying very hard to invest these companies in which they
are not allowed.216 As mentioned, the JOBS Act must be viewed as a wellintended balance between these competing interests.217 But, ironically
enough, the solution to this problem might present itself in another part of
the JOBS Act, perhaps under Tittle III.218
Both Rule 506(c) and § 4(a)(6) work well because they work handin-hand.219 They can be effective because they may run concurrently.220 The
very presence of the crowdfunding offering effectively eliminates the need
for purchasers to falsify accreditation status to participate in an offering that
is publicly solicited under 506(c).221 This is because a reasonable alternative
for unaccredited investors now exists through the use of an intermediary for
a crowdfunding offering.222 Accredited investors may participate via 506(c),
and non-accredited investors may participate via the crowdfunding
offering.223 Hence, the issuer wins because it can now gain access to the
entire general public (directly soliciting accredited investors and also
funneling non-accredited investors through a crowdfunding offering),
investors are protected because they are either accredited and know what
they are doing or they are being guided properly by intermediary funding
portals in a crowdfunding offering, and the SEC fulfills its obligation to
212
Id.
Id.
214
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
215
See Securities Act of 1933 § 4A, 15 U.S.C. § 77d-1; see also Bradford, supra note 13.
216
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
217
See discussion supra Part IV.
218
See source Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 106 Stat. 306 (2012).
219
See discussion supra Part III.
220
See discussion supra Part III.
221
See discussion supra Part III.B-C.
222
See discussion supra Part III.B-C.
223
See discussion supra Part III.B-C.
213
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keep with the spirit of balance between investor protection and positive
economic growth.224 It is a win, win, win situation—no real risk of fraud
and plenty of opportunity in an emerging capital market.
V. THE POSITIVE FUTURE FOR START-UPS
It is important to note that this area of securities regulation is in its
infancy—equity crowdfunding has much to evolve into. Undoubtedly there
will be issues, many of which may lead to litigation. In turn, guidance and
interpretation from the courts will follow, helping to shape the future of
equity crowdfunding. Through it all, the need for even more positive reform
will present itself, and hopefully those opportunities are taken.
For instance, perhaps the SEC should not wait for court opinion
regarding the specifics of integration and concurrent offerings between
506(c) and § 4(a)(6—while 506(c) allows for general advertising and
solicitation, does the crowdfunding exemption really allow for it as
described above?225 Can a company conducting an offering under § 4(a)(6)
advertise and solicit?226 What happens when the issuer is engaged in a
506(c) offering and comes across an unaccredited investor to whom the
issuer has already advertised a great deal? Can that unaccredited investor
simply ignore the general solicitation and be directed to the crowdfunding
offering via the intermediary?227 One would hope that the answer is simply
“yes,” as this is the only approach that makes sense—how can issuers
crowdfund without reaching the crowd? The proposed rules for the
crowdfunding exemption have much to say on this subject, and the SEC is
also requesting public comment.228 Perhaps more discussion is necessary
with regards to both concurrence and punishment for unavoidable
violations.
Whatever the future outcome of these issues, as it stands today, the
JOBS Act has the potential to deliver what it promises—opening up the
general public as a new emerging capital market and doing so in a safe
manner.229 When seen through the perspective of the two ever-present
competing interests of protecting investors from fraud and also trying
keeping burdensome regulations low in order for companies to secure
proper economic growth, the JOBS Act,with the help of the SEC, must be
seen as well-intended and as a step forward.230 The harms expressed by
critics are largely outweighed by the significant potential presented by the
crowdfunding industry for economic growth, or are simply not likely to
224
See discussion supra Part III.B-C.
See discussion supra Part III.B-C.
226
See discussion supra Part III.B-C.
227
See discussion supra Part III.B-C.
228
See Securities Act of 1933 § 4A(a), 15 U.S.C. § 77d-1(a).
229
See discussion supra Parts II.B.2, III. B-C.
230
See discussion supra Part IV.
225
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occur given the reasonable channels available to both investors and issuers.
While much remains to be seen, the outlook appears positive.