August 22, 2013
My background is as a computer systems engineer I have introduced innovations in the private, public and academic arenas over the past 20 years in the software industry. I was elated when Congress passed the JOBS Act, yet I am gravely concerned with the way the Commission has interpreted the Act.
First, it is important to understand that the Jumpstart Our Business Startups Act clearly is intended to remove barriers to business formation (startups) that research indicates are causal of 100% of JOBS in the United States of America. Congress intended to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies. Presumably the Commission intends the Proposed Rule to accomplish Congressional will otherwise, it would not have been proposed. Let us take a closer look.
As you are well aware, the Congressional mandate was for the SEC to revise Rule 506 to provide that the prohibition against general solicitation or general advertising...shall not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers ofthe securities are accredited investors." The simplest explanation of the Congress' will is that the inputs to the investment process be liberated (GSGA) as long as the outputs of the process yielded securities purchases only by accredited investors. This is much like purchasing alcohol at a supermarket: anyone can come into the venue, but if you purchase liquor then you must meet certain qualifications. What the Commission intends to do is constrain the inputs to the investment process by mandating that all materials be filed with the Commission before first use. It is analogous to a regime where everyone entering the supermarket must be ID'd in case one might purchase some alcohol: such a rule would shut down the supermarket if the Commission's intent is indeed to procedurally neutralize Congressional will, the first use rule is indeed an effective means to do so, particularly when more economical means of restricting the outputs are readily available, such as specifically policing whether investors in GSGA issuers are actually accredited or not.
The Commission also intends to penalize any procedural mistakes with a one-year fundraising ban. One calendar year could very well represent multiple product cycles to a startup counting on speed as its competitive advantage. As other commenters have pointed out, this proposed rule is a death penalty for what could have been a misdemeanor. The Commission has inadvertently been extremely effective in rule making whose outcome is to make the enabling legislation unusable by its intended beneficiaries, as the Commission has effectively created a regulatory minefield for infant companies to navigate.
As indicated earlier, the Commission proposes that all communications be filed with the it before first use. The simplest way to implement such a rule is for the Commissions to create its own Twitter, Facebook, YouTube, document sharing and email client software this would easily permit all GSGA to be captured by the SEC, cache it if necessary for the mandated 15 days, and then released to the public. Thought the notion appears farcical, it is the most reasonable and appropriate response to ensure compliance given the rules the Commission proposes to implement and the technological means of our age. Congress meant for the Commission to exempt certain issuers from rules based on certain conditions, not to create a vast new surveillance mechanisms while recognizing the Commission's need for research and enforcement mechanisms, much simpler solutions can be generated.
The Commission is welcome to contact me at 787-529-5892 or through sec@clearshore.us should you have any questions regarding the matters discussed above.