A piece on Jim Hamilton's blog on November 25th made me reflect again on what a good job the SEC actually did in its recent release proposing rules to implement the lifting of the ban on general solicitation and general advertising for offerings under Rule 506 where purchasers are restricted to accredited investors.
First, the Commission proposed to leave the existing Rule 506 alone, merely re-numerated as 506(b). This would mean that the startups and emerging companies that don't wish to engage in general solicitation or general advertising - or, better put, who already satisfy themselves they are within mainstream industry practice at complying with rules written in terms of media that no longer exist - could conduct offerings under Rule 506 the way they do now.
Second, for startups wanting to start advertising right away, as the JOBS Act promised - under the SEC's proposal they would have to follow (vaguely) heightened standards of "verification" of the status of the participating accredited investors. This was the quid pro quo under Section 201 of the JOBS Act, a toll that Congress exacted in exchange for the new permissiveness. As for what counted to satisfy the duty to verify, the Commission's proposed Rule 506(c) simply parroted the statutory language that "reasonable steps" would have to be taken. What's reasonable, the release stated, would depend on the facts and circumstances of a given offering.
What's so very smart about what the SEC proposed is that it would allow industry practice in as yet early days of the Internet Age to continue to evolve. Standards by which to grade the quality of "verification" would gradually ratchet up, over time, as the startup financing ecosystem became more comfortable with embracing 506(c) as the new normative. As alluded to above, compliance with existing 506(b) had already become ostensible at best; the actual practices of digital angels were no longer actually circumscribed by the old analog rules. 506(c) laid a path for new practices of compliance to emerge, and 506(b) provided a bridge over the transitional uncertainty.
Not remarked upon in the SEC release, but animating the potential vitality of the newly bifurcated Rule 506, was a subsection of Section 201 of the JOBS Act that did not require any rulemaking before it took effect. This was the new exemption from federal broker dealer regulation for online angel platforms - accredited investor crowdfunding, if you will. Channeling digital angel activity in the contours of that exemption would further serve to shape models of accredited investor verification that would in time entail "reasonable steps" under Rule 506(c).
Jim Hamilton's article reminds me that Joe Wallin, Doug Cornelius and I are not necessarily in a lonely minority in thinking the SEC got this one right. There's a letter from the Federal Regulation of Securities Committee of the American Bar Association that also praises the SEC for the approach proposed.
Photo: Graham Binns/Flickr.