Crowdfunding Under Rule 506: Is the SEC Intentionally Undermining the Intention of the JOBS Act?
Last week I tweeted out a link to a very insightful Law 360 article written by Joseph McLaughlin of Sidley. I simply sent the tweet without posting comment because McLaughlin’s article speaks for itself in a very eloquent way. What I failed to realize is that the Law 360 article is behind a paid registration wall. Sorry about that. If you have a subscription, the article is here. If not, have no worry because McLaughlin has now publicly commented on the SEC’s proposed rule 506 changes designed to implement the JOBS Act’s elimination of the prohibition against general solicitation. You can find his equally insightful letter to the SEC here. If you have any interest in preserving the possibility that the JOBS Act will realize the Congressional intention to open up capital from accredited investors, you should read his letter because the proposed regs may well be an SEC attempt to undermine that legislation.
As proposed, Rule 506(c) would require companies to take “reasonable steps” to verify that investors are accredited investors. That seems harmless enough on its face. However, the rule does not provide any clarity on what such “reasonable steps” should be. Therefore, companies cannot have any assurance that the steps they have taken are sufficient in the circumstances. Furthermore, even if they were “reasonable,” there is no assurance that a disgruntled investor will not sue just to cause a problem or blackmail the company with the prospect of bad publicity and large legal expenses. McLaughlin persuasively suggests that all this uncertainty is not likely an accident but represents an intentional effort to circumvent provisions of the JOBS Act that the SEC actively argued against. This could be the first evidence that the SEC has an agenda to impose its own will over the clear legislative intent of the JOBS Act. Stay tuned.