Wednesday, October 02, 2013

Senators Urge SEC to Take a Different Approach in Monitoring General Solicitations in Regulation D Offerings

In a comment letter to SEC Chair Mary Jo White, Senators Jerry Moran (R-KN) and Mark Warner (D-VA) expressed concern with the proposed rules regarding Regulation D, Form D and Rule 156, which threaten to slow down or stop the usage of general solicitation offerings by startup entrepreneurs, thereby conflicting with the intentions of the JOBS Act. For example, under the proposals issuers must file a Form D fifteen days before they begin advertising their offering, delaying their fundraising and adding costs and heavy regulatory burdens, particularly for smaller and newer businesses. Instead of the 15-day filing period, suggested the senators, both members of the Banking Committee, the Commission could tie the Form D requirement to the term sheet for the offering or another appropriate milestone.

It is also proposed that entrepreneurs must submit their advertising materials to the SEC on the same day they are used, an enormous requirement for small young companies with few resources for compliance. Advertisements must also include a long set of standard disclosures, noted the senators, which may increase the costs of advertising space for startups and which is difficult to accommodate when utilizing new technologies, such as Twitter. Here, they suggested that the Commission could create an abbreviated set of disclosures or a process that recognizes the challenges posed by character limit requirements. Alternatively, the Commission could require issuers to include standard disclosures on term sheets instead of on the advertisements.

While the proposed rules allow an issuer a one-time 30-day period to correct a missed deadline in filing reports or submitting materials, the penalty for the issuer if they miss another deadline is quite severe in that they are automatically prohibited from using Rule 506 for an offering for one year. The senators urged the Commission to consider alternatives that are proportional to the severity of the infraction.

In the aggregate, said the senators, these proposed requirements and penalties seem burdensome to issuers, investors, and startups. They suggested that a better approach may be to ask several advisory bodies and working groups that the SEC has in the small business and investor protection area to form a working group or committee whose purpose is the monitoring of the form and content of Regulation D generally solicited and advertised materials and report back to the Commission on a regular basis, with anonymized examples. Such a process may better enable the Commission to address challenges such as the collection of solicitation materials given the iterative nature of advertising and offerings, including the use of social media and discussion forums that are updated frequently.
Regarding the lifting of the ban on general solicitations that the SEC has already implemented, the senators believe that investors and the public would benefit by the addition of more methods as reasonable steps to verify accredited investor status in the Commission' s principle-based approach to verification methodology. The four non-mandatory "safe harbors" included in the final rule present challenges for both startups and the early-stage investors who support them. Providing documentation of income or wealth to issuers and even to third-party certifiers is difficult, they noted, adding that, according to the Angel Capital Association, a number of its member angel groups are considering halting their activities if members must furnish private financial information to an entrepreneur or to a verifying agent. The senators are concerned that this requirement will lead to a drop in this very important type of investment, causing substantial harm to startups and the economy.