If you’re like me, you might be having trouble sorting out the new JOBS Act (properly, the Jumpstart Our Business Startups Act) that President Obama signed into law on April 5. The written and online analyses seem to be essentially correct but they are far too sketchy to let us all participate in the discussion. To understand the law and to have a well-thought opinion on what it means, you need to have a basic understanding of how U.S. securities laws function.
We all know that startups sell securities without registering under the Securities Act. They do this through one or more specific exemptions from registration that are contained in the Act itself. Probably the most well-known exemption is Section 4(2) of the Securities Act, which exempts “transactions by an issuer not involving any public offering.” The next question is, obviously, “What is a “public offering?” Unfortunately, the Securities Act doesn’t tell us and the SEC won’t. They feel that it’s better to keep people guessing and, on the advice of counsel, erring on the side of caution. Even now, the SEC will often settle enforcement actions rather than let the case go to court – a court opinion could upset decades of SEC policy, after all.
Nevertheless, the SEC has used its rulemaking authority to define some things that are not “public offerings.” These so-called “safe harbors” account for most of the unregistered, or “private” offerings of securities in the U.S. In Regulation D, the SEC has created a set of detailed steps that, if followed precisely, mean that an offering will not be a “public offering” and will fall within the Section 4(2) or other exemptions. The JOBS Act essentially forces a change in Reg D to permit advertising even during a supposedly “private” placement of securities that is not a public offering.
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