Crowdfunding and the Ban on General Solicitation

18 Rabbits Bars

While entrepreneurs are looking to create crowdfunding portals under Title III of the JOBS Act, small business owners looking to raise capital should keep an eye on the regulatory changes under Title II of the JOBS Act. That may do a better job of opening the spigot for capital than the avalanche of crowdfunding portals likely to appear.

Look at the case of Alison Bailey Vercruysse, a maker of granola-based foods, and her company 18 Rabbits. According to a story in yesterday’s Washington Post, her products attracted a loyal following, but she could not tap those fans for capital as she tried to grow her firm.

“People would come up to me in different places and say: ‘I’m interested in investing in your company. How can I do that?’ ” Vercruysse said. “I couldn’t say we were trying to raise money. I’d end up saying things like; ‘Buy our granola. That would help us.’ ”

Without the ban on general solicitation, the company could put a message on its packaging or its website for accredited investors interested in investing.

Currently, the Securities and Exchange Commission has a ban on the use of general advertising and solicitation for raising private capital under the most popular exemption, Rule 506. Title II of the JOBS Act requires the SEC to remove that ban for offering where all investors are accredited. The agency tried to rush the rules last summer to meet the Congressional deadline, but investor advocates demanded that the SEC slow down. The SEC is gathering public comment before finalizing the rule.

Two SEC commissioners, Dan Gallagher and Troy Paredes, were in favor of immediately lifting the ban. SEC Commissioner Luis Aguilar did not like the rule, saying it lacked adequate investor protections. The fourth SEC Commissioner, Elise Walter voted for the proposal, but expressed concerns. She has stated the SEC must consider ways to mitigate potential harm to investors. The fifth and presumably deciding Commissioner’s seat is vacant with the departure of Mary Shapiro. Looking into my crystal ball, it would seem that the rule is not going to be finalized anytime soon. At least not until the vacancy is filled.

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2 Responses to Crowdfunding and the Ban on General Solicitation

  1. William Carleton January 15, 2013 at 9:06 pm #

    As a practical matter, and speaking as one who thought the proposed rules were brilliant and should have been either embraced by the investment community as released or issued by the SEC as interim final rules (or both), I fear your forecast is sound.

    At the same time, there is this issue about the JOBS Act setting a deadline of July 2012 for the implementing rules. I know there are Dodd-Frank rules longer overdue, but the scope of these rules should be narrow: verification of accredited investor status, not an overhaul of Form D, not substantive regulation of the content of advertising, not a re-examination of the accredited investor thresholds.

    • Doug Cornelius January 15, 2013 at 9:41 pm #

      The July 2012 deadline was never a realistic deadline. If Congress wanted to make it immediate, they could have explicitly changed the statute. Instead they took a roundabout approach and required the SEC to change the regulation based on the existing statute.

      The SEC is in the middle of having its regulations challenged for a failure to do adequate cost-benefit analyses and other procedural challenges. So the thought of rushing through a radical change to the regulatory structure would go over like week old fish.

      As much as ban on general solicitation is an impediment to capital raising. It also has a bright red flag when a company blatantly violates it. That makes it easy to spot a bad company, either because it’s a fraud or does not understand the basic rules of capital raising.