December 20, 2012
Some people have claimed that the JOBS Act will allow issuers to "circumvent" registration under State and Federal securities law.
This claim is a patently-invalid assertion. The JOBS Act does not allow companies to "circumvent" registration under the 1934 Exchange Act nor under State securities law, and it should be remembered that no member of Congress can arbitrarily disallow owners of private property from exercising their private property rights without contravening the U.S. Constitution. It is not Congress nor the SEC that "allows" private participants in the economy to have and to hold private property legitimately and rightfully.
The only appropriate role of regulation of private property rights in the United States is to protect the public interest in preventing fraud and abuse or decreasing government corruption and systemic problems such as the condition we still have today. Today, only those issuers who can afford to register securities with the SEC and sell those registered securities through broker-dealers are realistically capable of entering the market in a material way with substantial capital sourced from investors with whom the issuer does not have a pre-existing substantive relationship.
Registration with the SEC pursuant to the 1934 Exchange Act has never been mandatory for all companies. The requirement to register with the Commission has been, continuously since 1934, mandatory only for certain companies such as those that exceed capitalization and investor population thresholds.
Furthermore, Federal securities law has always allowed unsophisticated individuals to buy securities from unregistered issuers, and the JOBS Act does substantially the same in its crowdfunding provisions or by way of existing Federal law governing private placement offerings. For example, Rule 506 already allows up to 35 non-accredited investors during any 12-month non-integrated offering period. Does anyone consider this to be "allowing companies to circumvent registration" and are such unregistered sales to non-accredited investors considered to be so hazardous to the public interest that Congress believes it has the authority and the duty to stop them from happening? No, obviously nobody believes that these sales in relatively small numbers to relatively unsophisticated investors represent a public hazard. Nobody truly fears that companies will "circumvent registration" by availing themselves of basic private property rights that are guaranteed equally to all by the U.S. Constitution.
The JOBS Act allows issuers who are not required to register with the SEC to raise capital and to form new investor relationships with both accredited and non-accredited investors who are members of the general public, while remaining unregistered, until such time as they exceed the thresholds above which mandatory registration has been imposed by statute in keeping with the appropriate government function of protecting the public interest.
When general solicitation is conducted pursuant to the JOBS Act, it will, by design of the JOBS Act, simultaneously result in the opportunity for issuers to sell unregistered securities to non-accredited investors in compliance with relevant laws and in keeping with anti-fraud provisions. Those unregistered sales to non-accredited investors must comply with applicable State and Federal laws, and issuers must govern themselves according to the spirit and the letter of the JOBS Act in order to be eligible to engage in general solicitation in connection with sales of securities to accredited investors. These general solicitations will obviously attract non-accredited investors, also, and issuers will merely be required to delay or invest additional time and effort in complying with the law in order to sell unregistered securities to those investors, also, in a different manner of offering and at a different time compared to the offering that is generally advertised.
It remains to be seen just what the SEC will craft in rulemaking relating to the potential for issuers to conduct simultaneous crowdfunding offerings and transactions with non-accredited investors concurrent with private placement Rule 506(c) public offerings to accredited investors. The JOBS Act does not expressly prohibit such simultaneous parallel offerings, so one presumes that everyone will steer non-accredited investors to a crowdfunding portal on the one hand while generally soliciting and advertising the issuers' stock to, and closing transactions directly with, accredited investors on the other.
One hopes that the existing free-trading secondary markets for Over The Counter unlisted securities will not be abused in this process. Stopping fraud and abuse in the secondary markets is hard. There are also conventional legitimate public interests and hazards inherent to resales not the least of which are anti-money-laundering and insider trading or illegal market manipulation regulations that everyone will agree must continue to be regulated.
Resales of previously-issued securities in the secondary markets, whether listed or unlisted, whether registered or unregistered, are where the true public hazard exists predominantly, not in the primary market for direct investment. Congress and the SEC should focus resources on those secondary market and resale issues, and stop all this unconstitutional posturing and the political deceptions because neither Congress nor the SEC has the constitutional right to prohibit people from the legitimate enjoyment of their private property rights.
Co-Founder and CEO
Public Startup Company, Inc.