The JOBS Act: What AngelList Is Doing About The Proposed SEC Rules To Overhaul Startup Financing

William Carleton, Contributing Editor, VCExperts

This just tweeted: AngelList has set up a webpage to educate everyone on the SEC's proposed rules that would impose pre-filing, information filing and mandatory legend requirements on Rule 506(c) offerings.

"506(c)" is the shorthand way for referring to the new version of Reg D Rule 506 under which it will, come September 23, be okay to "generally solicit and generally advertise" for investors, as long as you have taken reasonable steps to verify that all purchasers in the deal are accredited.

Those rules are final, will go into effect September 23, and include a list of "non-mandatory, non-exclusive methods" by which a company can be deemed to have satisfied the obligation to take "reasonable steps" to verify the accredited status of investors.

What's less known is that, on the same day it released the final rules lifting the ban on general solicitation and establishing new Rule 506(c), the SEC also proposed new rules that would significantly change Reg D itself.

And the proposed new rules aren't good for startups or emerging companies! Many of them would make new Rule 506(c) much less useful than Congress intended it to be. Other proposed changes would impact "old" Rule 506, now known as Rule 506(b), making it harder to raise money "the old way," as well.

AngelList has submitted a comment letter, too, to the SEC. This is a must-read for everyone that cares about the startup financing ecosystem. I particularly love the discussion on how startup financing is different from Wall Street financing. Here's an excerpt from the letter, on that point:

"The proposed rules appear to be tailored to how Wall Street raises funds, not the startup community. If the issuer generates a detailed Private Placement Memorandum (PPM) and circulates it to a variety of investors, then most of the steps detailed in the proposal may not be difficult: just file a Form D 15 days before you circulate the PPM, file the PPM with the SEC, and amend the Form D when the financing is complete. The fact that non-compliance is severely punished is not a concern in this scenario, because the issuers, investment banks, and law firms know and implement the rules carefully."

"However, the same rules applied to early stage startups will prevent them from forming.... Modern entrepreneurs usually are not well-financed business people; they are engineers and designers who realize their idea is growing fast enough that they need capital to feed it. They often need small amounts of capital (less than $1 million) and can't afford the lawyers, investment bankers and broker dealers the proposed rules imply must be available to them. The proposed requirements involve many technical legal determinations, which most startups will not be able to afford at that stage. Because the rules are written with well-financed and well-lawyered issuers in mind, the result will be inadvertent non-compliance by otherwise well-meaning startups. Combined with the stiff penalties, this can prevent the early stage startups from fundraising entirely."

William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at