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From JOBS to SOBS

Thumbnail image for MSL-logo_CMYK.jpgTerri Krivosha is a partner at Minneapolis commercial law firm Maslon Edelman Borman & Brand, LLP and serves as chair of the firm's Business & Securities Group. She works with a vibrant network of entrepreneurial and dynamic businesses and those who fund them.

The JOBS Act legislation created by Congress in April 2012 was supposed to help American startups and entrepreneurs gain traction quickly. The idea was simple: use the power of the Internet to "increase American job creation and economic growth by providing access to the public capital markets for emerging growth companies." Ironically, the rules for implementation written by the Securities and Exchange Commission reflect a pre-Internet world. The SEC applied its plodding, uniform, linear, and rigid approach of rule making to the Internet--a culture that thrives on self-direction, improvisation, flexibility, and rapid action--turning the JOBS Act into more of a SOBS Act (Stifle our Business Startups).

It has now been 22 months since enactment and on October 23, 2013, the SEC announced with great fanfare that it voted unanimously to propose rules regarding the JOBS Act and in particular whether startup companies could sell securities over the internet to non-accredited investors. Based on this, the JOBS act has "created greater employment"--for individuals who work at the Securities and Exchange Commission. This is not what Congress envisioned in enacting this legislation. The net effect of the SEC's outdated approach is likely to be only more rules, more work for attorneys, and more confusion.

Already, entrepreneurs are confused as to whether the JOBS act applies to them and why they can't generally advertise their offerings. Angel fund investors are also confused, as they are uncertain as to what rules they have to comply with; and individuals mistakenly think they can now invest and buy securities in private companies via the internet.

In addition, the new rules governing Section 506(c) of Regulation D which permit general solicitation by issuers in private placements require that the investors must be accredited and the issuer must now use "reasonable steps" to verify that the investors are accredited. What used to be the review and signature of an investor on a questionnaire has now ballooned into much more, including the possible requirement that the investor provide tax returns to the issuer. As a result, Rule 506(c), as interpreted by the SEC, has made it almost impossible to be used by entrepreneurs. No investor will provide tax returns to an entrepreneur they met through the Internet (or to any entrepreneur for that matter).

What started out as an effort to Jumpstart Our Business Startups (JOBS) has indeed become a sure way to Stifle Our Business Startups (SOBS). Why? Because the government failed to grasp the fundamental mismatch between rule making as it used to be pre-Internet, and rule making as it must be re-envisioned to exploit the Internet's culture of individual control and decision-making.

Angel investor groups and entrepreneurs are still hotly debating whether allowing startup companies to raise funds through crowd funding and permitting general solicitation of private offerings are good ideas. However, what no one seems to realize is that this is a clash of two cultures. The linear approach of the SEC and the fluid approach of entrepreneurs to make use of the internet to advertise and find investors, as promised by Congress in the JOBS act, are in direct conflict. So as the law is structured now, we should lower our expectations from more Jobs to just more Sobs over the lost opportunity for job creation.

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