RIA Compliance Blog

As previously noted in this firm’s sister blog (see “Private Placement Brokers Should be Legalized along with M&A Brokers” in the RIA Compliance Blog, Jan. 21, 2015), there has long been a large gray market of unregistered private placement brokers. Also see “Report and Recommendations of the Task Force on Private Placement Broker-Dealers” (American Bar Association Business Law Task Force, 2005). This cadre, often calling themselves “finders,” have continued to operate in plain sight, with little response from the SEC other than the issuance of a few inconsistent no-action letters and an occasional enforcement action against such brokers whose conduct was egregious in other ways.

The SEC’s Advisory Committee on Small and Emerging Companies (the “Committee”) has twice weighed-in on this subject urging SEC action.

The Committee first reported on this subject September 23, 2015, noting that:

The JOBS Act requires the SEC to make inflation adjustments to certain JOBS Act rules every five years. Recent SEC action marks the first of these adjustments, effective on the fifth anniversary of the JOBS Act’s April 5, 2012 adoption. The following adjustments have been announced for Title III Regulation Crowdfunding or “Regulation CF”:

1. The maximum aggregate amount an issuer can sell under Regulation CF in a 12 month period has been increased from $1,000,000 to $1,070,000;

2. The threshold for assessing an investor’s annual income or net worth to determine investment limits is increased from $100,000 to $107,000;

As Regulation Crowdfunding or “Reg CF,” the SEC’s extensive rules implementing the federal/interstate crowdfunding provisions (Title III) of the JOBS Act, recently marked its one-year anniversary, the congressional author of Title III, Congressman Patrick McHenry (R-NC), is now urging the SEC to essentially rewrite Reg CF.

McHenry, a leading crowdfunding industry proponent, outlines his proposal in a seven page May 15th letter to newly sworn-in SEC Chairman Jay Clayton. In his letter to Clayton, McHenry calls for a “comprehensive reform” of Reg CF, outlining in great detail 13 specific revisions to Reg CF that he believes necessary for start-ups and small businesses to fully take advantage of the opportunities that crowdfunding offers. McHenry is hardly alone in his criticism of Reg CF, as the crowdfunding community has roundly panned Reg CF as excessively regulatory in nature and far too costly for start-ups to comply with. While it is unclear if or when the SEC will respond to McHenry’s letter, the proposal should be considered as the opening salvo in what will likely be a full court press by the crowdfunding community to have the rules implementing interstate crowdfunding rewritten in a way much more favorable to the start-up and growth company sectors. Indeed, Clayton’s multi-decade background as an M&A lawyer suggests that the SEC may at least adopt a heightened focus on capital formation issues.

Importantly, McHenry’s recommendations, in his opinion, are all fully within the SEC’s rulemaking ambit, and do not require any legislative action by Congress. Specifically, the main thrusts of McHenry’s proposal are as follows: