JOBS Act and You!

As you may be aware, President Obama signed the “Jumpstart Our Business Startups Act” (the JOBS Act) on April 5. This bill will make it substantially easier for companies to raise money, although key provisions do not take effect immediately.

Will these changes provide opportunities — or challenges — to those selling interests in notes secured by deeds of trust and similar investments?

Over the past 25 years, many new forms of securities offerings of interests in notes secured by deeds of trusts or “pool” arrangements for notes secured by deeds of trust have been created, some of which rely on rules that exempt the seller of the security from the necessity of obtaining qualification from state or federal authorities.

The changes effected by the JOBS Act relate to two types of exemptions, the exemption under Rule 506, commonly known as “Reg D,” and the less familiar “Reg A.”

First, let’s establish what the new rules DO NOT do. They DO NOT present an opportunity for new business models. The rules may best be summarized as providing some opportunity, but only with new and additional restrictions.

For more information, please read this summary, prepared by Bruce Methven, Esq. (His web site: http://www.methvenlaw.com)

Here are a few key issues to consider:

1. Will I be able to publicly advertise my security offered under a Rule 506 exemption?

While it is true that some form of advertising will be allowed under the yet unpublished rule, the new rule also changes how sellers of securities who use advertising will assure that the investors meet the threshold of being an “accredited investor” (that is, someone with a net worth of more than $1,000,000 exclusive of home and furnishings, or income over $300,000—per couple—for at least the past two years). The Act requires the SEC to issue regulations that “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors” when advertising is used.  Instead of relying on statements signed by the investor, the seller of the security who uses advertising will have to verify the net worth and income, although it’s not known yet what will be required in the way of verification. Failure to accurately verify will, of course, result in possible liability for securities fraud.

For Rule 506 offerings that use advertising, this means that the level of due diligence will be increased to certify that investors are exempt. Self-certification, which is the case now, will not be allowed if the offering is advertised.

Also, until the SEC issues new regulations, the old regulations remain in place and no advertising can be done.  In addition, the new regulations may well limit advertising to ONLY “public tombstone” ads, which are standard in the industry.

Of course, no one yet knows what the regulations that the SEC will adopt will look like.

These regulations may have a substantial effect on the public advertising and “Affiliates” provisions.

Our advice: DO NOT to take any sudden action now—such as hiring counsel and starting up a new business model—but rather wait to see what the rules actually state.

2. Can I sell my security offered under Regulation D (Rule 506) to more investors?

While the new rules MAY allow a company to have more than 500 investors, the raising of this limit does not in any way impact the question of what the minimum investment should be by each investor. This is a much more complicated issue relating to suitability, which is the impetus for our counseling caution, and represents another fine point that some attorneys may choose to ignore in order to generate business during this period wherein the rules are not clearly defined.

3. Can I use Regulation A+ to offer securities on a national basis?

It is likely that Regulation A+ will be of limited or no use to real estate brokers. The old Regulation A allowed companies to raise $5,000,000 with less disclosure and compliance than a full SEC registration, although most states have not adopted exemptions that fit well with Regulation A. The limit has been raised to $50,000,000, but most, if not all, competent securities lawyers would advise that the Regulation A procedure is inappropriate for real estate brokers or CFLs. Simply put, the purpose of Regulation A is NOT to allow brokers (who may not meet the SEC’s requirements) to find lenders (who may not meet the SEC’s requirements) to fund pools of loans nationally.

The problem is, unlike with crowdfunding and the public advertising of Rule 506 offerings, this “Small Issues” (Section 401) exemption only preempts state law if either the securities are 1) offered or sold on a national securities exchange—which means going public; or 2) are sold only to “qualified purchasers.”

A “qualified purchaser” is defined as:

  • a person with more than $5 million in investment;
  • a company with more than $5 million in investments owned by close family members;
  • a trust, not formed for the investment, with more than $5 million in investments;
  • an investment manager with more than $25 million under management; or
  • a company with more than $25 million of investments.

That’s a much higher standard than “accredited investor,” which requires only $1 million in net assets or $200,000 in annual income (or $300,000 in annual income with a spouse).

We are exhorting our readers and our clients to read this article and then make up your own minds about what tools are available now and what tools may be available in the future.

Before you decide this may be the time for a new business model, we recommend that you consult with competent securities counsel.

If you would like assistance with finding and selecting counsel, please e-mail us at info@the3wisemen.

Leave a Reply

Your email address will not be published. Required fields are marked *

*