The President recently signed the Jumpstart Our Business Startups Act (known as the "JOBS Act") with broad bipartisan support. The JOBS Act removes restrictions on solicitation and advertising for companies seeking to raise capital in private offerings (as opposed to a costly public offering). This change greatly expands a company's ability to reach large numbers of sophisticated investors and will fundamentally change the way that private capital is raised.
Currently, most offerings of securities that are not "public offerings" registered with the Securities and Exchange Commission (the "SEC") (a very time-consuming and costly process) are conduct pursuant to exemptions for offers and sales of securities made in private offerings. Most private offerings are conducted pursuant to a safe harbor created by the SEC known as Regulation D. Rule 506 of Regulation D permits a company to raise an unlimited amount of money from an unlimited number of sophisticated investors, known as "accredited investors," as well as from a small number of non-accredited investors. In conducting an offer and sale under Regulation D, however, an issuer could not engage in a "general solicitation" or "general advertising." This meant that the issuer could not use any public media (radio, print, television, ads in trade publications or even cold calls) to offer its securities. In addition, an issuer could not use a list of contacts that it knew to be sophisticated in contacting investors, such as a list of company CEOs. Instead, an issuer had to have a substantive, pre-existing relationship with any potential investor it contacted, or, more commonly, had to retain a broker and rely on the broker's relationships and contacts. The broker, of course, would take a significant fee for its service.
The JOBS Act directs the SEC to eliminate the prohibition on general solicitation and advertising. Thus, once the rule is amended, issuers can go directly to investors with potential investment opportunities and even engage in mass marketing such as mailers, ads in trade publications, unsolicited requirements for meetings or even television or radio advertisements, so long as all of the ultimate investors are "accredited investors." This change will benefit companies engaged in private offerings by drastically increasing the pool of potential investors. Bringing aboard investors just became a lot easier by eliminating layers of red tape!
Stay tuned for the next installment concerning The JOBS Act!!