June 12, 2012
Title II — Access to Capital for Job Creators
Title II of the Act provides that the prohibition against general solicitation or general advertising contained in 17 CFR 230.502(c) shall not apply to offers and sales of securities made pursuant to 17 CFR 230.506, provided that all purchasers of the securities are accredited investors. It further requires the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. The Act also provides, subject to various requirements, that no person shall be subject to registration as a broker or dealer solely because that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means.
The importance of this aspect of the Act is often underrated. Typical small business owners know a limited number of accredited investors (i.e. very affluent people). They are thus effectively forced by the securities laws pre-existing relationship requirements to pay broker-dealers large fees to make introductions. This aspect of the law will allow them, should they choose, to try to directly seek accredited investors.
Rule 506 Generally
Our primary concern with respect to Title II is that the Commission resist the temptation to alter Rule 506 in a way that increases the burden on, or risk to, those using the exemption. No additional requirements should be added.
In our judgment, the Act is clear:
the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors.
The Act does not require or encourage other revisions to Rule 506.
General Solicitation or General Advertising
There is no need for the Commission to further regulate the general solicitation or general advertising seeking accredited investors. Issuers are subject to the anti-fraud provisions of federal and state securities laws and accredited investors and their advisors are in a position to look after themselves and take risks. If, however, the Commission undertakes to regulate those solicitations and advertisements directed at securing accredited investors, it is imperative that the rules be clear and simple to comply with. They should not introduce a series of difficult judgment calls that create regulatory risk that will serve as a powerful disincentive to take advantage of the changes made by Title II.
Reasonable Belief Standard
The reasonable belief standard regarding accredited investor status should be retained. The traditional and almost universal current practice of using investor questionnaires combined with investor self-certification to establish accredited investor status should continue to be allowed and be deemed to constitute taking reasonable steps to verify that purchasers of the securities are accredited investors as required by the JOBS Act. There is neither legislative history supporting nor any other reason to believe the proposition that Congress intended to undermine the laudable policy goals of the Act by changing the current long-standing practice with respect to verifying accredited investor status.
If the Commission feels compelled to change existing practice, then a certification by the investors attorney, CPA, certified financial advisor or other professional should be sufficient. This, of course, will add expense to the entire process and have a negative impact on investor returns and willingness to invest in Regulation D offerings.
Section 413 (b) of Title IV of the Dodd-Frank Act provides that the Commission may undertake a review of the definition of the term "accredited investor", as such term applies to natural persons, to determine whether the requirements of the definition, excluding the requirement relating to the net worth standard described in subsection (a), should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.
NSBA strongly opposes increasing accredited investor threshold. In light of the economy, the last thing regulators should do is make it more difficult for small, dynamic companies seeking investors to raise capital. There is no evidence that the threshold is too low. And it is not in the public interest to deny investors access to the investments that will create jobs, enhance productivity and foster innovation.