Frauds happen every day, of almost all sizes and shapes. But when the rules change, as they did with the Jumpstart Our Business Startups (JOBS) Act we get excited, and rightly so, about how the changes may impact the liability landscape. For this reason, news that the Commonwealth of Massachusetts has just charged two crowdfunders attracted our attention.
JOBS Act Changed General Solicitation Rule
One of those rules that changed back in April with the passage of the JOBS Act was the rule against general solicitation, which had prohibited sellers of private securities from randomly contacting people outside of their personal networks. Ever wondered why you don’t see TV commercials or billboards or pop-ups trying to sell you specific stocks? No? The reason is the prohibition against general solicitation.*
The JOBS Act changed that for “accredited investors.” Of all the new regulations and guidance that the U.S. Securities and Exchange Commission is charged with releasing on how to understand and implement the JOBS Act, they got a proposal out on accredited investors.
JOBS Act Redefined “Accredited Investor”
In August, the SEC released its first proposal for a relaxation of general solicitation for accredited investors. It includes a definition of “accredited investor” that includes natural persons and entities. Natural persons—individuals—may be accredited investors based on either their net worth or their annual income. Accredited investors include:
- Natural persons whose individual net worth, or joint net worth with a spouse, exceeds $1 million, excluding the value of the person’s primary residence (the “net worth test”)
- Individuals with income in excess of $200,000 in each of the two most recent years
- Individuals whose joint income with a spouse exceeds of $300,000 in each of the two most recent years and has a reasonable expectation of reaching the same income level in the current year (the “income test”).
What the JOBS Act Didn’t Change
But even with the change in general solicitation rules to allow more marketing of investments—the new rules still don’t permit sellers to mislead buyers about investments, fail to disclose previous fraud, or cold-call potential investors in violation of “general solicitation” rules. Lying and misleading investors and regulators were and continue to be illegal.
So, it sounds as though these cases may not actually be about the novel dangers of newfangled crowdfunding, just possible old-fashioned fraud.
* Although the terms “general solicitation” and “general advertising” are not defined in the relevant regulations, Rule 502(c) provides examples of general solicitation and general advertising, including advertisements published in newspapers and magazines, television and radio broadcasts, and seminars where the attendees are invited by general solicitation or general advertising. Reg. D was adopted back in 1982 as a result of the SEC’s evaluation of the impact of its rules on the ability of small businesses to raise capital.