Dan Rosen

The JOBS Act — or Jumpstart Our Business Startups Act — was supposed to have a very simple purpose when President Barack Obama signed it into law 17 months ago.  Essentially, it was designed to cut red tap — much of it dating to the 1930s — and open the doors for startups to more easily raise capital by actually being able to talk publicly about fundraising efforts.

But, as with most things involving government regulation, it’s not been that easy. At least that’s the insight from Dan Rosen, the Seattle angel investor whose been on the front lines of the regulatory changes as chairman of the Angel Capital Association’s public policy committee.

“As currently drafted, it is both an opportunity and a problem,” said Rosen, who leads the Alliance of Angels, one of Seattle’s leading angel groups. “I’d even say the Congress people who wrote (the JOBS act) and the SEC who is chartered to interpret it aren’t necessarily conversant with what it’s supposed to do.”

First, the good news.

Rosen said changes through the JOBS Act almost immediately made it easier for companies to conduct IPOs by unraveling a lot of the excesses of the Dodd-Frank securities law. “Without exception, people think this has been a really good thing,” he said.

However, the biggest problem revolves around the idea of “general solicitation” — the idea that entrepreneurs can publicly talk about raising cash without getting slapped by the SEC. To date, startups have walked a narrow tightrope when raising money, skirting SEC rules whenever they talked about their cash needs in a public spot (including news sites like GeekWire).

Ironically, Rosen made his comments this week at the Zino Zillionaire Investment Forum — a startup pitch competition in which more than a dozen startups competed for the attention of angel investors. Technically, under the old law, investment confabs like Zino’s and the TechStars Demo Day, put startups in a tough place legally if they were to mention their fundraising needs during pitches.

The JOBS Act was supposed to fix that issue, but Rosen said, as it stands now, it may have just complicated things even more. Fortune’s Dan Primack weighed in on the issue in his column today, noting the “tricky” situation now in front of startups who present at public forums, like the TechStars Demo Day.

Rosen provided one of the best explanations I’ve heard of what’s going on right now in his remarks at the Zino event, in which I also served on the panel. Here are Rosen’s remarks as it relates to the JOBS Act:

“The second thing that seemed rather uncontroversial at the time was recognizing that the Internet existed and that angel investors come together at conferences like this and hear from companies. We thought it would be a good thing to make that legal, because under existing security regulation, it was illegal. It’s called a public offering. You are doing general solicitation. So, we said: ‘Let’s make that legal. Isn’t that a good idea?’

And they passed this handedly…. Well, a large portion of my last four months has been taken up by SEC commentary about what that actually means, and how difficult that is going to be. They put in place some draft regulations that are going to make this so-called 506C offering really, really hard. We are fighting this tooth and nail, and the state securities administrators want a say in it, and the jury is still out on what will happen.

But, as currently drafted, it is both an opportunity and a problem. The first thing we did is we got (the SEC) to say that the existing process is still legal, so that if you want to do quiet offering pitching only to angels that you know, you can do it the existing way and nothing bad happens.

The problem is that a lot of the existing practices were technically illegal under the law, but had never been prosecuted.

And, now they are saying: ‘Hey, wait a second all of those existing things you did — like holding a (Zino) Zilliionaire Forum — are now going to be consider general solicitation.’ And then we said: ‘How bad can that be.’ Until the draft rules came down, which said that any company during general solicitation has to file an advanced form D with the SEC 15 days in advance of the first general solicitation event.

So, in this case, using (this event) as an example — every company that was listed as a presenting company had to file this form 15 days before the first ad for the event came out. Like that is ever going to happen.

The worst part is what happens if you don’t. If you don’t (file the form) — you made a mistake, you goofed up. So, you then send in a note to the SEC saying: “OK, here is my advanced form D. I made a mistake. I missed the window.’ And they say: ‘Shame on you, and that’s your only warning. If you do it again, you are banned from raising money for a year.’

That’s a death sentence for a startup. We are fighting this.”

Rosen and others are spending hours trying to form an education campaign to inform regulators of the importance of angel investing, and the role it plays in the American economy. As Rosen says: “It is not Wall Street, it is everywhere. It is not only Seattle and Mercer Island, but it is Spokane. It is Vancouver. It is Tri-Cities. It is everywhere, and every city across the country.”

He’s hopeful that the proper changes to the rules will be made, making it easier for angel investors to coordinate over the Internet and for entrepreneurs to pitch their startup ideas without penalty. He said they’ve had some success convincing the SEC of the changes needed in the existing draft rules. The main goal, he said, is to make it so entrepreneurs “can start companies cost effectively and in a quick way.”

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  • William Carleton

    I agree with Dan that the proposed rules are not a good thing. But fortunately we don’t have to deal with the proposed rules when new Rule 506(c) goes into effect on Monday, September 23 (just three days from now).

    For a period of time – who knows how long, perhaps only briefly, perhaps for many months – we are going to get general solicitation in angel deals as Congress intended it. That is, no pre-filing, no information filing requirements, no penalty box.

    Is there a catch to the new kind of angel investing that will allow advertising and will go into effect on Monday? Sure, you bet there is. Heightened verification requirements. If you advertise, you’re going to have to take reasonable steps to verify the accredited status of your purchasers.

    That, in and of itself, is a lot for the ecosystem to digest. It’s onerous enough that many of the serial entrepreneurs I know are not going to be using the new rule. They are going to stick with the old rule, with no advertising and no heightened “verification.”

    But first time entrepreneurs, especially, are going to use 506(c). And public pitch events, at least as conducted today, are going to almost necessarily put any participating companies into needing to deal with 506(c) and heightened verification.

    Don’t blame the SEC for heightened verification! Congress in its wisdom required it, right in the JOBS Act. (Congress did not require all the additional rules that the SEC has PROPOSED, but, again, those proposed rules aren’t going into effect next weekl but Rule 506(c) is.)

    Monday is going to be interesting! I plan to be blogging about how some of the major players in the industry will be “welcoming” new Rule 506(c). Which, again, is a lot to digest, but is not the end of world.

    • Blah

      Great thoughts Bill and Dan. Interesting that many are going to continue with the old rules. The verification requirements are also a hidden tax and impediment for companies and investors, which seem to frustrate some of the purpose of the rules.

      I’m a reasonably regular angel investor (a few deals a year most years, probably 20 total) and I am not willing to provide my W-2 or investment account statements to small startups or their law firms in order to have the privilege of making an investment. I don’t think I’m alone in that. Frankly, the world of Seattle is too small and information passes too fluidly to provide this. My employer would not be overjoyed to have my W-2 presented to a company or one of the handful of law firms in town who work with technology companies. The data would become instant “benchmarking”. My investment account statements are similarly private to me.

      I really don’t understand the purpose of the verification requirement in any event. For many, many years allowing “accredited investors” to invest when receiving less information was a legal assumption that the investor was more sophisticated and able to bear the loss. Essentially, under the old scheme if someone self-certified they were accredited but were in fact not accredited it protected the company from a securities lawsuit because the company could still rely on the self-certification. In the .com heyday I’m sure some people did self-certify erroneously and they paid the price. I don’t really understand the verification purpose other than to create more headaches.

      Does anyone really think that a sleazy provider/company/bank/investment bank/finder/etc. is going to be affected by the verification requirement?

  • Sang Lee

    The proposed rules are just very short sighted and poorly structured. In the grander scheme of things it does make sense to throw out broad and seemingly incomplete rules for the public to comment on. However, it is now on the SEC to actually take the comments into account. The spirit of the legislation itself was to increase transparency and access to capital for small businesses not to collect more information which would increase friction in capital formation, not decrease it.

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