Last week the SEC approved a key provision of the JOBS Act that was signed into law last year. The provision lifted a ban on general solicitation or general advertising for certain private securities offerings.
What does this mean? First, let’s get something out of the way. This only applies to accredited investors. The rules governing the part of the JOBS Act that deals with non-accredited investors have yet to be written. Even so, this is still a big deal for many funds, platforms and private companies targeting accredited investors.
Until now, any private offerings targeting accredited investors could not be advertised…at all. Not only that these offerings could only be sold to people with whom the company had a pre-existing relationship. This meant that these offerings had to operate through word of mouth or through a network of financial advisors.
So, you might think that the total of such offerings would not be a very big number. You would be wrong. These so called Rule 506 offerings raised approximately $900 billion in 2012 according to the SEC. Now, that number should be even more given that the restriction on advertising is about to be lifted.
Commentary from Industry Leaders
Rather than try to explain how this is going to impact the funds and platforms targeting accredited investors I decided to go to the source. I contacted several industry leaders who could be directly affected by this change.
First, we hear from Brendan Ross, whose Direct Lending Income Fund I profiled back in May. You may recall that this fund invests in short term, high yield small business loans and it is open to accredited investors only. Here is what Brendan had to say.
Today I’m the General Partner in a business lending fund, but I started as an investor in P2P consumer loans. I loved Lending Club and Prosper, but to shift even more out of stocks I needed more web-based underwriters. I knew business loans had higher yields and lower defaults, and I had Google. I searched for “small business loans” and called all of the top 100 search returns looking for someone to sell me business loans. Six months later I started the Direct Lending Income Fund.
The JOBS Act will allow me to tell my story – the story of my business lending fund – to thousands more P2P investors. Perhaps a few hundred will qualify and become investors in my Fund. I plan to start advertising, in compliance with SEC rules, wherever P2P investors gather today. P2P investors “get” what I’m doing right away, and once they see the portfolio of loans, they want in.
Next I contacted Jonathan Barlow, who is the founder of Eaglewood Capital. They target accredited investors looking to invest in consumer loans issued by Lending Club. I wrote a short piece on Eaglewood back in January.
We are excited about this development, which removes the ban on general solicitation and general advertising, subject to certain conditions. This will make it easier for us to describe our funds and separately managed accounts to our target market – accredited investors. While we will have to take certain steps to verify accredited investor status under the new rule, we believe that the net result will be positive for our industry and for investors, in that more accredited investors will become aware of what Eaglewood has to offer.
Someone a little different is Jilliene Helman, co-founder of Realty Mogul (profiled here in March). This is not a fund, it is a platform for crowdfunding real estate investments but again they are targeting accredited investors.
I think the change is going to impact us to a great extent. Although there are a few more strings attached to using general solicitation with Reg D 506 (c), it has the potential to fundamentally change our business. For the first time in decades we can openly share and market investments as they are being funded. We can promote them through all of our social media channels, Twitter, Facebook, LinkedIN, etc. and we can advertise in more traditional ways – magazines, newspapers and billboards.
The impact to “crowdfunding” is minimal as it still does not open up our business to non-accredited investors, but it makes building relationships with accredited investors much, much easier. In the past, I would go to cocktail parties with high net worth individuals and I wasn’t allowed to talk about our open real estate transactions or upcoming investments. Now we can “shout them from the rooftops”, assuming we file a Form D notice with the SEC 15 days before we start shouting.
Finally, I contacted crowdfunding expert and my fellow LendIt Conference co-founder Dara Albright. She has been following the JOBS Act since well before it was drafted and has written about its implications extensively on her Nowstreet Journal. Here is what she had to say:
Last week’s SEC adoption of title II of the JOBS Act marked an historic moment for the capital markets. But the solicitation ban is just one of the many regulatory obstacles that stymies small business capital formation and impedes economic growth. Until we allow all socio-economic classes equal access to investment opportunities, the wealth disparity will continue to widen and the economy will remain weak. I am hopeful that a more democratic financial system will arise upon implementation of title III.
So there you have it. Four different perspectives on this new rule. Personally, this will make my job of writing about these investment opportunities much easier. In conversations with fund owners I am often given virtually no information worth sharing and it makes covering this space that much more difficult. So, I am looking forward to this change.
The new rule takes affect 60 days after it is published in the Federal Register. In the last week this news has been covered extensively in the media – you can read more about the implications of this rule change in The Wall Street Journal, The Huffington Post, TheStreet.com and Forbes among other places.