House Representatives Consider Fixes to the JOBS Act and Regulation D

Based on the dissatisfaction of some House members to the SEC’s proposed Regulation D and JOBS Act Title III equity crowdfunding rules, several bills have been proposed to amend various provisions of the JOBS Act and Regulation D, and head off many of the restrictive rules being considered by the SEC. The first bill attempts to ensure the ease of use Reg D, Rule 506, and Form D. First, the bill prohibits the SEC from requiring the filing of a Form D either in advance of or after the sale of securities under Rule 506, or conditioning the availability of Rule 506 on the filing of a Form D. The bill proposes to eliminate verification of accredited investor status of purchasers as a condition of the availability of Rule 506, or at least just Rule 506(c). The bill also proposes to permit companies to use Reg D to sell securities to employees of the issuer. Finally, the bill would prohibit the SEC from requiring the submission of general solicitation materials earlier than 60 days after the closing of an offering, or requiring that general solicitation materials be submitted more than once in an offering. The second bill, proposed by Congressman Patrick McHenry (who proposed the original House bill that ultimately became the JOBS Act) seeks to amend provisions of Title III of the JOBS Act. The bill first proposes to increase the amounts that can be raised by crowdfunding in any 12 month period to $3 million, or $5 million with audited financials, addressing concerns that the costs of compliance with equity crowdfunding regulations would not be worth the limited amounts that can currently be raised with equity crowdfunding. The bill also simplifies the 12-month aggregate limits for each investor, to the greatest of $5000 (annually adjusted by CPI), 10% of annual income, or 10% of net worth. The bill also allows companies raising less than $500,000 to certify their own financial statements, and to only require companies raising between $500,000 and $3 million to have their financials reviewed by a CPA. However, the bill also requires companies using equity crowdfunding to be organized as corporations. The bill also modifies the responsibilities of the intermediary websites that will host the crowdfunding offerings, including requiring intermediaries to inform prospective investors of the risks of crowdfunding investment and testing investors to ensure that they actually understand those risks. The bill also authorizes intermediaries to require companies to state a target offering amount, and withhold funds until that target is met; intermediaries can also run background checks on company executives and perform some due diligence, and de-list companies who fail to comply with the crowdfunding law and regulations. The bill also simplifies the burden for intermediaries in verifying investor information, by allowing intermediaries to accept the self-certification of investors as to their status. Finally, the bill also exempts crowdfunding investors from a company’s shareholder cap, and preempts state securities regulation (although it does not preempt state enforcement actions).

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