CHAPTER 9 Other capital formation discussions
formation and on the IPO process more specifically. In the months ahead, the SEC must continue to make progress with the implementation of the regulations required by the JOBS Act. It is also likely that, in addition to these rule- making initiatives, we will see additional consideration of a number of topics related to capital formation in the United States. Below, we highlight what we believe to be a few of the areas that are likely to receive substantive attention in the near future.
A
Accredited investor status As discussed in Chapter 4, Title II of the JOBS Act required that the SEC implement regulations relaxing the prohibition against general solicitation and general advertising in connection with certain private offerings conducted pursuant to Rule 506 under Regulation D. The JOBS Act also required an additional measure of verification of the investor’s status as an accredited investor in connection with any Rule 506 offering employing general solicitation. Investor verification was required given that for private placements where general solicitation was used it was possible for an issuer or a financial intermediary working on the issuer’s behalf to contact potential investors with whom neither the issuer nor the financial adviser had a pre-existing relationship. Congresswoman Maxine Waters was the sponsor of an amendment to HR 2940 that created the requirement of reasonable steps to verify, and her language was ultimately included in section 201(a)(1) of the JOBS Act. Waters explained the rationale for her amendment as follows: … I am concerned about the process in which
accredited investors verify that they are in fact accredited. As I understand it, it is currently a self-certification process. This obviously leaves room for fraud … If we are rolling back protections for our targeted audience of sophisticated individuals, we must take steps to ensure that those folks are in fact sophisticated.1 Historically, in the United States, the statutory private
74 JOBS Act Quick Start
s we noted in the Introduction, the JOBS Act was the continuation of a dialogue regarding the impact of increased regulation and increased disclosure requirements on capital
placement exemption, or section 4(a)(2) exemption, was available for a “private offering,” which was understood to be an offering made on a limited basis to a group of investors with whom the issuer, or the issuer’s agent, had a pre-existing relationship, and who were in a position to have or to obtain certain information about the issuer. An offering made under proposed Rule 506(c) would still be considered a private placement; however, it would involve an offering to investors with whom the issuer potentially had no pre-existing relationship, and who might not necessarily receive any specified information about the issuer before making their investment decision. As a result, many commentators writing to the SEC about its proposed Rule 506 rules have expressed investor protection concerns. Commentators have noted that there is enhanced opportunity for fraudulent practices where general solicitation is used. News about a potential private offering may reach investors that are not accredited investors, and the information circulated about a potential investment opportunity may contain puffery or other misstatements. As a result of these concerns, many, including SEC Commissioner Aguilar have suggested that the SEC should revisit the definition of accredited investor and consider whether the definition sufficiently identifies investors that have the requisite financial sophistication to fend for themselves and not have the protections associated with registered securities offerings.2
Recent changes to the definition of accredited investor On December 21 2011, the SEC amended the accredited investor standards in its rules under the Securities Act to implement section 413(a) of the Dodd-Frank Act.3
The
change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act on July 21 2010; however, section 413(a) also required the SEC to revise its Securities Act rules to conform to the new standard.4
Rules 2155 and 501(a)(5)6 Act set forth the accredited investor standards.7
under the Securities Pursuant to
section 413(a) of the Dodd-Frank Act, the SEC is required to adjust the net worth standard for natural persons individually or jointly with their spouse, to “more than
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