Dan Primack said it best: “Apparently the SEC thinks deadlines are for chumps.” Or at least they seem to act that way. Yesterday the SEC decided to postpone its review of the JOBS Act. Again. Only for a week this time, or so they say.
The extensions are frustrating for anyone in the private markets because – until the SEC issues its regulations – most of the provisions of the JOBS Act are looming but inactive. That leaves everyone trying to anticipate how the industry will change, but we’re left with little idea of what is actually going to happen.
We won’t let uncertainty stop us though. There is some small light, hidden in the dark place that is the SEC rumor mill. In lieu of reporting on the actual outcome of the meeting that was supposed to happen yesterday, we’re going to muddle through all of the rumors and bring back the most likely outcomes. Based on the structure of the Act and the SEC’s stance, a few changes are highly anticipated. Here are how the changes will most likely affect the industry:
One of the most transformative changes in the JOBS Act is the elimination of the general solicitation ban. Traditionally, companies have only been able to solicit an accredited investor with whom they share a pre-existing relationship but, according to the new amendment, pre-existing relationships are unnecessary. After the SEC decides exactly how, you should be able to communicate (with only accredited investors) by way of print, televised or social media, or through mass third-party websites. Essentially it’s open season for advertisers.
This certainly changes things. As Dorsey & Whitney LLP has explained, “Once the SEC’s rules eliminating the prohibition on general solicitation are in place, it is likely that we will see an entirely new practice of broadly disseminated offerings of various sizes to accredited investors, through the Internet and other media.” Investment bankers and advisors are going to need to quickly get up to speed on new technologies and marketing methods. The groups that are creative and take advantage, when the SEC explains exactly the limits of course, will have an advantage over slow movers.
For every action there is an equal and opposite reaction. Although it may seem like general solicitation will bring new investors from the woodwork, that is not necessarily the case. Although firms can now solicit generally, they will also be required to take “reasonable steps” to confirm that each purchaser is an accredited investor. What are “reasonable steps”? We’ll see next Wednesday. Maybe.
The partners at JDTP believe that, “the SEC will use this invitation to significantly tighten the due diligence requirements for issuers to verify accredited investor status.” Although solicitation may become easier, the accreditation verification could become significantly harder. The net change in fundraising is unclear at this point.
Although identifying and interacting with accredited investors has always been important, it is becoming even more so. It may be worthwhile to take a closer look at some of your typical investors and check to see if they are likely to survive a tighter filter.
Another particularly transformative provision of the JOBS Act is the new ability to “crowdfund”. The provision allows companies to raise up to $1 million in unregistered capital from non-accredited investors. The companies will use specialized websites to source the capital. Much like the pending accredited investor verification process, the SEC must define regulations for these crowdfunding websites. The parameters of these sites are much less uncertain because there is no existing structure to build on. It also doesn’t help that Chairman Schapiro has openly expressed her skepticism about crowdfunding. On the other hand, many people believe there is significant potential.
Several months ago, Nicole Denny of Kaufmin, Rossin, & Co. encouraged burgeoning crowdfunders to invest in their online presence, to redirect marketing efforts to develop a crowdfund pitch, and to perform a cost-benefit analysis. Although it is hard to be certain of the website details, the general movement of online crowdfunding is evident and entrepreneurs can take these steps to generally better position themselves.
The new method to raise short-term capital can be extremely helpful for starting business. Crowdfunding could help newer businesses ramp up, tapping into the essentially unlimited pool of investors. Although it is important to position your business to take advantage of crowdfunding, tread somewhat carefully.
This provision of the JOBS Act – unfortunately not named for its superlative performance – is an evolution of the existing Regulation A. The new law increases the amount of capital small companies can raise without significant SEC involvement from $5 million to $50 million. That’s a significant jump.
Although Reg A+ is technically a development of Reg A, the latter was rarely used. Because $5 million is a relatively low maximum, the exemption was viewed as more cumbersome than helpful. With a $50 million ceiling, however, it is an entirely different conversation. Reg A+ could open up a whole new pipeline of capital for newer businesses and a whole new set of opportunities for boutique investment banks. It allows for investments from non-accredited investors, is not “restricted,” and may be offered and sold publicly.
For boutique banks this could end up being a lucrative practice, shifting some client work from courting private equity groups and venture capitalists to taking groups quasi-public in order to fund continued growth. With the significantly higher capital ceiling, full IPOs will get shifted towards larger companies looking for significant amounts of capital or options for employees.
Although we cannot be certain where the future (or the SEC) will take us, we can be certain that there is change on the horizon. If these provisions pass in the anticipated format, the private markets could end up dramatically altered.
If you want to learn more about the JOBS Act, register for our Webinar on September 7th.