Richard W. Jones

Mr. Jones is an attorney with the Atlanta,Georgia law firm of Jones & Haley,P.C. Mr. Jones concentrates his practice on securities law matters,such as public offerings,IPO's,private placements,SEC compliance,broker/dealer and investment adviser regulation and hedge funds. For further information go to

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National Venture Exchange

             Historically,the SEC has made it difficult for purchasers of stock in private companies,to sell their stock.  This has restricted the liquidity available to private companies and it has been an impediment to growth and capital raising opportunities.

            In recent years,we have seen some high profile companies,such as Facebook,have privately traded stock in which the company facilitated transfers of that stock.  These cases have created an atmosphere of greater regulatory acceptance of the resale of private company securities (also known as “Restricted Securities”.)

            On Wednesday,the House Financial Services Committee passed a bill that would enable the creation of national venture exchanges for early stage growth companies.  The bill will soon be sent to the Full House of Representatives for a vote.

            Under the new Venture Exchange Bill early stage growth companies will be allowed to have their restricted securities purchased and sold on an exchange similar to transactions on the NASDAQ.  To some extent,this is a follow up to the recently expanded Regulation A Exemption,which allows securities sold under that exemption to be freely traded.  If the new law passes Regulation A securities as well as restricted securities initially sold pursuant to other exemptions may be purchased and sold in an exchange environment regulated by Securities &Exchange Commission. 

            The purpose of the new Venture Exchanges is to create liquidity for small businesses and to encourage capital formation in the private securities market.

            We believe that these measures will be a great boon to the private securities market and should help popularize private placements as a means of providing capital to small cap companies.

            Not many details have been revealed about the new legislation.  It is only applicable to early stage growth companies,which are defined as those with a capitalization of one billion dollars or less.  The legislation has not been approved by the Senate at this point,but we will be watching to see if Congress can deliver a bill to us that will provide liquidity and more investor interest in small cap companies.  We will keep you posted about any new developments.          


   Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at    Copyright© 2015 by Jones &Haley,P.C. all rights reserved.



SEC Approves Crowd Funding – Sort Of


            All those lovers of crowd funding can now cheer.  The SEC has passed rules that allow companies to raise capital through the use of crowd funding techniques.   But did the crowd funding proponents really get what they wanted from these rules?  Not exactly.  Let’s examine the new rules,and you will see what I mean.

            For those who may not know,crowd funding is the ability to sell shares of stock in a company – or any other type of security —over the internet to lots of people through relatively small individual purchases.  On October 30,pursuant to the Jumpstart Our Business Start-ups Act,the U.S. Securities Exchange Commission finally adopted rules to permit companies to use crowd funding techniques to raise capital.  The SEC said that it developed the new rules to allow smaller companies to more easily raise capital while at the same time providing protection to investors.  The new rules will take effect in the second quarter of 2016.

Limitations on Amounts being Raised

            There are limitations on the amount of money companies can raise under the new rules. They are limited to raising a maximum of $1 million during any twelve (12) month period.  Also,there are limitations on how much an investor can invest under the crowd funding rules.  If an investor’s annual income or net worth is less than $100,000,the investor will be allowed to invest no more than the greater of $2,000 or 5% of the investor’s annual income.   If the investor’s annual income and net worth are $100,000 or more,the investor may invest 10% of the lesser of the investor’s annual income or net worth,not to exceed $100,000.00.


Limitations on the Companies that can use the New Rules

            Certain business entities are prohibited from raising money using the Crowd Funding Rules.  Those entities are as follows: 

            (1) a business entity that’s organized outside the United States;

            (2) an entity that is publicly reporting under the Securities Exchange Act 1934;

            (3) investment companies;

            (4) an entity that has failed to comply with the annual reporting requirements under the     Crowd Funding Rules during the two (2) years immediately preceding the filing of an       offering statement;and

            (5) an entity that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with a company that is not identified.  

Disclosure Statement

            In order to use the Crowd Funding Rules an issuer must prepare a disclosure document that provides the information that is similar to the information found in a prospectus.  This document must be filed with the SEC prior to being used,and it must be delivered to each investor. 

Financial Statements

            The type of financial statements that are required to be provided under the Crowd Funding Rules depend upon the amount of funds the issuer is planning to raise in the crowd funding offering.  If the amount to be raised is $100,000 or less,the issuer is only required to provide its total income,taxable income,and the total tax reported on its federal income tax return for the most recently completed fiscal year.   In this case the financial statements must be certified by the principal executive officer of the issuer,but no outside accountant or audit is required.  If the issuer is raising more than $100,000 but less than $500,000,the issuer must provide financial statements that have been reviewed by a public accountant that is independent of the issuer.  If the issuer is planning to raise more than $500,000,it must provide financial statements that are audited by a public accountant that is independent of the issuer.  However,an issuer that is using the Crowd Funding Rules to raise capital for the first time,and who is raising more than $500,000,but not more a $1 million may provide financial statements that are reviewed by a public accountant that is independent of the issuer.  In the event that an issuer has audited financial statements available,those must be provided in any case.

Ongoing Reporting Requirements

            Once an issuer completes an offering of securities under the Crowd Funding Rules,the issuer must file with the Commission,and post on its website an annual report following the end of its fiscal year.  The annual report must contain the following elements:

            (1) financial statements certified by the principle executive officer of the issuer to be true and complete in all material respects;

            (2) a description of the financial condition of the issuer;

            (3) disclosures that are similar to those contained in annual reports filed by reporting         companies. 

            The issuer must continue to file these annual reports until one of the following occurs: 

            (1) the issuer is required under the Securities Exchange Act of 1934 to file reports with     the SEC;

            (2)  If the issuer has less than 300 shareholders,it only has to file the report for one year;(3)  The issuer has filed annual reports for three years and its total assets do not exceed       $10 million;

            (4) the issuer or another party repurchases all the securities issued in the crowd funding    offering;or

            (5) the issuer liquidates or dissolves its business in accordance with state law.

Required Use of Intermediary Platforms

            Sales under the Crowd Funding Rules may only be made through an intermediary platform registered with the SEC.  These platforms can be sponsored by a registered broker or a registered funding portal.  A funding portal is prohibited from providing investment advice or recommendations for the purchase or sale of securities.  In addition,it is prohibited from soliciting purchases,sales or offers to buy the securities displayed on its platform.   Funding portals are also prohibited from compensating employees,agents,or other persons for solicitating sales of securities displayed on its platform.  In addition,portals are prohibited from holding,managing,possessing or otherwise handling investor funds or securities.


            Issuers using the crowd funding rules are very limited in their ability to advertise.  They may only advertise the terms of the crowd funding offering by directing investors to the intermediary’s platform. In addition,an issuer may include no more than the following information in the ad: 

            (1) a statement that the issuer is conducting an offering pursuant to the Crowd Funding     Rules with the name of the intermediary through which the offering is being conducted          and a link directing the potential investor to the intermediary platform;

            (2) the terms of the offering,and

            (3) factual information about the legal identity and business location of the issuer. 

This information must be limited to:

            (a) the name of the issuer;

            (b) the address,phone number and website of the issuer;

            (c) the email address of the representative of the issuer;and

            (d) a brief description of the business of the issuer.  

            In addition,an issuer or an issuer’s representatives may communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary’s platform,provided that the issuer identifies itself as the issuer.  In addition,all persons communicating with potential investors on behalf of the issuer must do so only on the intermediary platform and must identify their relationship with the issuer.  

Compensation to Promoters

            An issuer or person acting on the issuer’s behalf is permitted to compensate a person who promotes the issuer’s offering under the Crowd Funding Rules only if the promoter communicates through communication channels provided by the intermediary on the intermediary’s platform,and the promoter clearly discloses the receipt of such compensation.


            Securities purchased in a crowd funding transaction under the rules cannot be resold by the purchaser for a period of one year from the date of purchase,unless they are sold to an accredited investor.  An accredited investor is generally a person that has annual earned income of $200,000 for two consecutive years and/or a person that has a net worth of $1 million. 

Bad Boy Rules

            Certain issuers are prohibited from issuing securities using the Crowd Funding Rules altogether.  Generally,this applies to any issuer that has a director,officer,general partner,  managing member,or a beneficial owner of 20% or more of the issuer’s outstanding voting equity securities,any promoter connected with the issuer in any capacity at the time of such sale,any person who has or will be paid for solicitation of purchasers in connection with the sale of securities,any general partner,director,officer or managing member of the issuer who meets any of the following criteria:

            1) the person has been convicted within ten years before the filing of the offering statement —five years in the case of an issuer’s predecessors and affiliated issuers —of        any felony or misdemeanor: 

            (a) in connection with the purchase or sale of securities;

            (b) involving the making of any false filing with the SEC;or

            (c) arising out of the conduct of the business of an underwriter,broker,or municipal         securities dealer,investment advisor,funding portal or paid solicitor of purchasers of securities.

            2)  The person has been subject to any order,judgment or decree entered within five years before the filing of the offering statement with the Securities Exchange Commission that at the time of such filing restrains or enjoins such persons from engaging or continue to engage in any practice: 

            (a) in connection with the purchase or sale of securities;

            (b) involving making of any false filing to the SEC;or  

            (c) arising out of  the conduct of the business of an underwriter,broker,dealer,municipal securities dealer,investment adviser,funding portal or paid solicitor of purchasers of securities.

            3)  The person is subject to a final order of any state securities commission or state authority that supervises or examines banks,savings association or credit unions that at the time of the filing of the offering statement filed under the Crowd Funding Rules bars a person from: 

                        a)  association with any entity regulated by such commission;

                        b)  engaging in the business of securities,insurance or banking;or

                        c)  engaging in a savings association or credit union activities.

            This also applies to any final order that has been issued against the party based upon a violation of any law or regulation that prohibits fraudulent,manipulative or deceptive conduct entered within ten years before the filing of the offering statement.

            4)   Any person that is subject to an order of the SEC that: 

            (a)  suspends or revokes such person’s registration as a broker,dealer,municipal securities dealer,investment adviser or funding portal;

            (b)  places limitations on the activities,functions or operation of such person;or

            (c)  bars such person from being associated with any entity or from participating in an offering of penny stock. 

            5)   Any person that is subject to any order of the SEC entered within five years before the filing of the offering statement that require a person to cease and desist from committing or causing a violation or future violation of:

            (a)  any scienter-based antifraud provision;or

            (b)  Section 5 of the Securities Act.

            6)  Any person that is suspended or expelled from membership in and/or suspended or barred from association with a member of a registered national securities exchange or a registered national or affiliated securities association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade. 

            7)  Any person that has filed as registrant or issuer with the SEC or if the person was named as an underwriter in any registration statement filed with the SEC that within five years before the filing of the offering statement was the subject of a refusal order,stop order or order suspending a Regulation A exemption or at the time of such filing was the subject of an investigation or proceeding to determine whether a stock order or suspension order should be issued.

            8)  Any person that is subject to a United States Postal Service False Representation Order entered within five years of the filing of the offering statement or is at the time subject to a temporary restraining order or preliminary injunction with the respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of a false representation.


            There are other features of the new rules that are significant but those described above provide a pretty good outline of the newly established rules.  Now that you know the SEC Crowd Funding Rules,you can see that they are much more restrictive than you may have anticipated or had hoped for.  I think many people thought that the new SEC crowd funding program would be a panacea that would allow sales of securities in small amounts to a large number of people on the internet with a minimum of regulation.  Instead,what we have is crowd funding rules that are very restrictive.  The rules restrict which issuers may make sales,and they restrict who the purchasers are that may purchase the securities.  They require fairly expensive disclosure documents to be prepared and filed with the Securities Exchange Commission.  They require the preparation of financial statements,depending on the amount of securities being sold,and most importantly,they require sales to be made only through an authorized portal or intermediary.  In addition,they have bad boy provisions that prohibit the use of the crowd funding rules where the issuer is associated with people that meet an extensive bad boy criteria list.   The rules also require ongoing filing of annual reports,which is costly and time consuming and they prohibit general solicitation or advertising outside of the portal or intermediary platform,unless such advertising meets very specific limited requirements.

            The new Crowd Funding Rules may not be as robust or as flexible as many may have hoped,but they still represent a substantial enlargement of the tools available for businesses to raise money and it is a first step to really take advantage of the internet and crowd funding concept,which is a worthy innovation in itself.  Accordingly,we are available to help any issuers,intermediaries or investors comply with the new Crowd Funding Rules and conduct a successful crowd funding offering.  Feel free to contact us.

   Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at 





Copyright© 2015 by Jones &Haley,P.C. all rights reserved.










SEC Changes Course and Allows Business Brokers to Receive Commissions on Business Stock Sales

Prior to 1985,the SEC did not consider the sale of a business structured as a stock sale to be a sale of securities under the securities laws.  This was known as the Sale of Business Doctrine.  As a result,the penalties and rules that apply to securities sales did not apply to the sale of a business,and business brokers and merger and acquisition brokers were able to receive commissions in connections with those sales without being registered as a broker dealer.  This changed in 1985 when the Supreme Court of the United States took the position that the sale of a business structured as a stock sale was indeed the sale of securities.  As a result,business brokers and merger and acquisition brokers were prohibited from earning commissions in connection with those sales unless they were registered as a broker dealer.  This created substantial implications for business brokers and mergers and acquisition brokers,especially where a transaction started out structured as a sale of assets and then during the course of negotiations,the transaction was restructured to be a sale of stock.  In that case,business brokers and merger and acquisition brokers that were not registered as broker dealers were theoretically prohibited from earning a commission,simply because the structure of the transaction had changed.  This result was often thought of as unfair in the industry. 

            The ABA task force on private placement broker dealers noted in its year 2000 final report that the broker dealer registration process involved significant costs as well as a regulatory model that is not the right size to accommodate the particular role played by business brokers in connection with the sale of a business.  The requirement to register as a broker dealer is a lengthy process and there are substantial costs and fees,together with start up and first year expenses,including legal,accounting,and operating costs that can equal several hundred thousand dollars.  Persons effecting one or several transactions a year simply cannot bear this financial burden.  These firms do not hold customer funds or securities and generally they merely introduce the parties to one another and transmit documents between the parties.  They do not participate in structuring or negotiating these transactions or otherwise advise the parties.  Both buyers and sellers in this type of transaction are typically represented by legal counsel who can assist with due diligence,draft the transactional documents and advise their clients on structure,tax considerations and contractual provisions and there are remedies,both contractual and by operation of law,that are available to the parties in these types of transactions.

            On January 31,2014,the SEC changed its mind about these matters and issued a long awaited no action letter permitting certain merger and acquisition brokers to receive commissions in connection with the sale of a business even where the sale is structured as a stock sale.

            Under the new interpretation,merger and acquisition brokers are permitted to facilitate acquisitions,mergers,business sales,and business combinations on behalf of buyers and sellers of privately-held companies and receive commissions in connection with the transaction.  Moreover,the letter does not limit the amount or type of compensation that a merger and acquisition broker may receive,and it does not limit the size of the privately-held company.  The letter also permits merger and acquisition brokers to advertise the sale of a privately-held company and include in such advertisements a description,general location and price range of the business.

            For purposes of this letter ruling,a privately-held company is one that does not have any class of securities registered or required to be registered with the SEC under Section 12 of The Exchange Act or to which it is required to file periodic reports under Section 15(d) of The Exchange Act.  Also the company must be a going concern and not a shell company.

            As is so often the case in these matters,there is a catch.  In this case,the catch is that the relief available under this no action letter is only available if the transaction satisfies ten (10) very specific conditions.    

            Those conditions are as follows:

            1.         The “merger and acquisition broker” must not have the ability to bind a party to a merger and acquisition transaction.  A “mergers and acquisition broker” for the purpose of the letter is a person engaged in the business of effecting the securities transaction solely in connection with the transfer of ownership and control of a privately-held company through the purchase,sale,exchange,issuance,repurchase,or redemption of,or business combination involving securities or assets of the company,to a buyer that will actively operate the company or the business with the assets of the acquired company. 

            2.         The merger and acquisition broker must not directly or indirectly through any of its affiliates provide financing for the merger and acquisition transaction.  The merger and acquisition broker may assist the purchaser in obtaining financing from an unaffiliated third party but they must comply with all applicable legal requirements and disclose to their client,in writing,the receipt of any compensation in connection with the financing.

            3.         The mergers and acquisition broker is prohibited from having custody,control or possession of or otherwise handling funds or securities issued or exchanged in connection with the merger and acquisition transaction or other securities transactions for the account of others.  The merger and acquisition transaction cannot involve a public offering.  Any offering of securities must be conducted in compliance with an applicable exemption from registration. 

            4.         No party to a merger and acquisition transaction may be a shell company,other than a business combination related company.

            5.         If a merger and acquisition broker represents both the buyer and the seller in a transaction it must provide clear written disclosure of the potential conflict to the parties it represents and it must obtain written consent from both parties to the joint representation.

            6.         A merger and acquisition broker may only facilitate a merger and acquisition transaction with a group of buyers if the group is formed without the assistance of the merger and acquisition broker.

            7.         Buyers or a group of buyers in a merger and acquisition transaction must control and actively operate the business acquired with the assets of that business.  In this regard,control will be considered to be achieved if the buyers have the power directly or indirectly to manage the company or the policies of the company through ownership of securities by contract or otherwise.  Under the view of the SEC,a buyer could be considered to actively operate an acquired company simply by possessing the power to elect executive officers and approve annual budgets or by service as an executive or other executive manager,among other things.  The necessary control will be presumed if at the completion of the transaction the buyer or group of buyers has the right to vote 25% or more of the class of voting securities;has the power to sell or direct the sale of 25% or more of a class of voting securities;or in the case of a partnership or limited liability company has the right to receive,upon dissolution 25% or more of the proceeds from the dissolution,or has contributed 5% or more of the capital to the transaction.  In addition,the buyer or a group of buyers must actively operate the company or the business acquired with the assets of the company.

            8.         No merger and acquisition transaction can result in the transfer of interests to a passive buyer or a group of passive buyers.

            9.         Any securities received by the buyer in the merger and acquisition transaction will be restricted securities within the meaning of Rule 144(a)(3) of The Securities Act.

            10.       A merger and acquisition broker must meet the following conditions:

                        (a)        The broker has not been barred from association with a broker dealer by the SEC or any state or self-regulatory organization.

                        (b)        The broker must not be suspended from association with a broker dealer. 

            These rules make very clear who will be entitled to the exemption provided in the no action letter.  As a result of these changes,business brokers and merger and acquisition brokers will no longer have to worry whether or not  they will be able to receive their commission in the event that a transaction is ultimately cast as a stock purchase.  The SEC’s actions in this instance are grounded in an understanding of the realities of the typical sale of business transaction.  The truth is that those transactions are structured on the basis of accounting or tax considerations,and not on the application of federal securities laws.  The sale of a business between sellers and buyers of privately-owned companies are qualitatively different in virtually every respect from traditional retail or institutional brokerage transactions. 

            We are encouraged that the SEC recognized these distinctions. This decision will clarify a tricky area of the law and provide appropriate relief to business brokers and mergers and acquisition brokers who work in this area. 

            Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at

Advertising and General Solicitations Now Allowed Under Regulation D Offerings

The SEC developed Regulation D to apply to private placement securities offerings and as a result,Regulation D has historically prohibited any form of general solicitation.  The term “general solicitation” in this context means advertising,television commercials,seminars,email broadcasts,junk mail solicitation,and other means of getting your message out to a large number of people you do not know.  Recently,as a result of the Jump Start Our Business Start Ups Act (the “Jobs Act”),the SEC has amended Rule 506 of Regulation D to allow general solicitations in very specific circumstances.  This change went into effect in September,2013,and it is a significant and material reversal of SEC policy that could be a tremendous boon for those planning to make use of Regulation D to raise capital.

            The SEC implemented the new rule by adding Section (c) to Rule 506.  In order to obtain the benefit of the new rule,an issuer must first meet all the other requirements of Regulation D,the purchasers of securities sold in the offering must be all accredited investors,and the issuer must take reasonable steps to verify that the purchasers of securities are accredited investors. 

            The term “accredited investor” in this context refers generally to an individual with a net worth of $1,000,000 and/or income of $200,000 annually.  There are other categories of investors that are defined as accredited investors,but for the purpose of this article,we will be referring to individuals who meet the criteria described above.

            Under old Rule 506(b),sales to accredited investors are exempt also,but no general solicitations are allowed.  However,under that rule,it is only necessary for the issuer to form a “reasonable belief” as to the status of the accredited investor.  This exemption stays in place.  In contrast,in order to use Rule 506(c) – and therefore make use of general solicitations —the issuer must “take reasonable steps to verify that all purchasers of the securities are accredited investors.”

            In the release implementing the new rule,the SEC emphasized that there could be many ways of taking reasonable steps to verify that an individual was accredited.  The SEC also acknowledged that in some cases many steps must be taken while in other cases fewer steps might be necessary.  For example,if the offering required a minimum investment of $1,000,000,very few steps would be necessary to confirm that the investor is accredited,because by the very nature of the investment it is highly likely that the investor would be accredited.

            The SEC emphasized that the “reasonable steps to verify” standard was intended to be subjective and to be based on reasonable actions in the circumstances.      This is a benefit to issuers,because it allows them to take the actions they see fit.  At the same time,it is a challenge to issuers,because it creates uncertainty,due to the fact that an issuer never knows for sure if its actions are sufficient to meet the reasonable steps to verify standard. 

            In an attempt to clarify the issue,the SEC did provide three (3) non-exclusive and non-mandatory methods of verifying that a natural person is an accredited investor.  They are as follows:

            1.         In order to satisfy the income requirement,the SEC recommends that the issuer review IRS forms that report a purchaser’s income for the 2 most recent years and that the issuer obtain a written representation from the purchaser that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.

            2.         With regard to whether an accredited investor meets the definition based on his net worth,the Commission recommends that the issuer review the investor’s bank statements,brokerage statements and other statements of securities holdings,certificates of deposit,tax assessments and appraisal reports issued by independent third parties and with respect to liabilities a consumer report from at least one nation-wide consumer reporting agency.

            3.         As an alternative to the methods noted above,the SEC recommends that the issuer obtain information from a registered broker-dealer,an investment advisor,a licensed attorney,or a certified public accountant that has made a determination that the investor was accredited within the prior three (3) months,based on either the income requirement or the net worth requirement.

            It is important to understand that those steps are not mandatory,but issuers should be careful to include measures that are designed around these suggested methods in order to make their determination and to assure they have taken “reasonable steps” to verify.

            These new verification methods will require potential investors to share much more of their confidential financial information with the issuer and those that have worked in this field know that potential investors are generally very reluctant to divulge this kind of information just to be allowed to make an investment.  This reluctance could create a significant barrier to this new type of offering.

            The SEC did not elaborate on the types of general solicitations that might be allowed under the new rule,but historically a general solicitation has been understood to mean any type of appeal to persons who are unknown to the issuer.  For example,advertising in newspapers and magazines,advertising on the internet,advertising on the television or radio,conducting seminars,and advertising through the mails.  Thus,issuers who comply with this rule should have a tremendous advantage over prior Regulation D offerings,because they will be free from the private placement rules that prohibited general solicitations.  Of course,it will be incumbent on the issuer to make sure that they meet all the requirements that will allow them to enjoy the benefit of Rule 506(c),and I would encourage them to seek experienced securities counsel to make sure that they meet the necessary requirements.  Failure to meet the standards of the rule would mean the exemption is not available and any sale of securities in that case,would be in violation of the registration requirements of the securities laws.

Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at

SEC Adopts New Rules on the Use of Social Media by Public Companies

              Over the years the SEC has passed many rules and regulations designed to prevent public companies from targeted or narrow disclosures of material facts. These rules and regulations  usually arose in the context of  managements discussions with analysts,which,by its nature, excluded the general public. The SEC wants public companies to make those disclosures in a broad general manner so that the entire market has the benefit of that information in order to make their investment decisions. This was why Regulation FD was passed in 2000.

             In the intervening years social media has become a primary source of information for millions of people. In light of that,and in light of certain disclosures in social media by the management of important public companies,the SEC decided that it was time to provide some guidance to public companies in this area,and they passed a new rule dealing with these issues.

             Under the new rule public companies will be allowed to make statements to the public through social media if they make clear which social media will serve as their outlet for announcements.

            I was recently interviewed on this topic and you can see my responses and learn more on this topic by clicking on the following link:    

             Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at


The New JOBS Act —Raising the Mandatory Registration Requirements

In April 2012,Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act” or “Act”).  The purpose of the JOBS Act was to reduce the regulatory burdens on businesses in order to allow them to create more jobs.  Most of the provisions of the JOBS Act went into effect immediately when the President signed the Act into law. 

            One part of the securities laws affected by the Act is the requirement that certain companies must register their shares with the SEC and must file reports with the SEC.  Since 1964,the SEC has required companies of a specified size to register under the Securities and Exchange Act of 1934 (“Exchange Act”).  Once they are so registered,they must begin filing the reports that are required under the Exchange Act,such as 10-Ks and 10-Qs.  In effect,these laws reflect the SEC’s recognition that companies which reach a certain size should be required to provide their shareholders and the public with information about their business and operations.  Historically,under Rule 12(g),the SEC set the minimum threshold for this mandatory filing to include companies which had more than $10,000,000 in assets and more than 500 shareholders of record.

            In reviewing the Rule 12(g) requirements,Congress decided that this threshold placed undue pressure on the financial markets,because it restricted the number of shareholders and the amount of assets that smaller companies could have,while remaining private.  This,in turn,limited the growth stage for companies,which needed more time and flexibility to develop before being burdened with the expenses and time consuming requirements of being a public company.  Congress felt that without relief from these regulatory hardships,small businesses would not grow or they would be acquired by larger firms.  In any event,both alternatives would likely lead to fewer jobs and less innovation.  This dynamic can be seen in companies like Facebook,which ultimately went public in part because it was approaching the 500 shareholder threshold.  In order to continue to grow,Facebook needed to sell more of its shares,which would likely trigger Exchange Act filing obligations.  As a result,Facebook chose to go public,perhaps before it was ready to do so.

            In order to address these problems,the JOBS Act increased the Rule 12(g) threshold.  Under the new rules,a company is not required to file with the SEC until it has $10,000,000 in assets and it has 2,000 shareholders,or in the alternative,it has 500 shareholders who are not accredited investors.  An accredited investor for purposes of the rule is someone with a net worth of one million dollars,without consideration of the equity in their house,or someone with annual income of $200,000. 

            One of the most significant changes in the new law is that employees of a company are excluded from the count of shareholders in determining whether the corporation meets the minimum shareholder threshold.  This is a truly useful change and it allows companies to keep and incentivize good employees without fear of exceeding the minimum shareholder limitations.  This will be a boon for fast-growing companies that compensate their employees with stock options and stock awards,and it will give those companies more time to develop,before being forced to file as a public company.

            The new rules have brought clarification to companies with $10,000,000 in assets and 2,000 or more shareholders,because it is clear that they are required to file with the SEC.  Also it has brought clarity to corporations with less than $10,000,000 in assets and/or less than 500 shareholders.  Those corporations do not have to file with the SEC.  Things are not so clear for corporations that have more than $10,000,000 in assets and have between 501 and 1,999 shareholders.  Corporations that fall into this category–I will refer to them as “Middle Tier Companies”–must file with the SEC unless they can prove that less than 500 of their shareholders are not accredited.  For example,if a corporation had 600 shareholders,it would have to establish that at least 101 of its shareholders are accredited in order to avoid the registration requirements.  To establish that shareholders are accredited–according to the legislative history–each accredited investor/shareholder would be required to fill out a form asserting that they meet the accredited investor definition and that they want to be outside of some of the protections of the securities laws.  This places substantial burdens on these Middle Tier Companies,and as a practical matter,it will be virtually impossible for them to prove how many of their shareholders are accredited.

            While Congress’ intent to provide greater flexibility to corporations is laudable,I fear that the new changes will lead to greater confusion and uncertainty.  In practice,it will be extremely difficult for Middle Tier Companies to police the number of shareholders that are accredited and unaccredited.  As a result,I would expect that most securities attorneys,in an abundance of caution,will advise all their clients with more than $10,000,000 in assets and 500 shareholders to file with the SEC under Rule 12(g).  Otherwise,the corporation runs the very real risk of violating the requirements of the Exchange Act.  If this is true,the new rule will not have the beneficial impact that was intended.  In light of these problems,perhaps Congress will revisit the rule and make it clearer and more practical in order to provide the relief to businesses that they were seeking.

            Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at

SEC Applies “Bad Boy” Rules to Regulation D Offerings

           Last year the US Securities and Exchange Commission proposed a new rule that would disqualify “bad actors” from using Rule 506 of Regulation D.  This is not a new concept,Rule 262 of Regulation A already has a “bad boy” disqualification,and many states also prohibit “bad boys” from using their exemptions.  However,the SEC was not reacting to activities in the marketplace by proposing the new rules.  They were reacting to Section 926 of the Dodd-Frank Act,which requires the SEC to adopt rules to disqualify certain persons from  making  use of the safe harbor provisions of Rule 506.

            Under the new proposal,the exemption provided by Rule 506 cannot be used if certain acts have been committed by certain “bad boys”.  In the Rule,these “bad boys” are referred to as “covered persons”.  The following are considered “covered persons” under the Rule:

            1.         The issuer and any predecessor of the issuer or affiliated issuers;

            2.         Any director,officer,general partner or managing member of the issuer;

            3.         Any beneficial owner of 10% or more of any class of the issuer’s equity securities;

            4.         Any promoter connected with the issuer in any capacity at the time of the sale;

            5.         Any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of securities in the offering;and

            6.         Any director,officer,general partner or managing member of any such compensated solicitor.

            The disqualifying events under the Rule,are the following:

            1.         Criminal convictions occurring within the past 5 years for issues and the past 10 years for other covered persons;

            2.         Court injunctions and restraining orders if issued within the past 5 years;

            3.         Final Orders of certain state regulators (such as state securities,banking and insurance regulators and federal regulators) in effect at the time of the proposed offering or if the final order is related to a securities violation or fraudulent conduct then the period extends to  ten years after the order is entered;

            4.         Commission disciplinary orders relating to brokers,dealers,municipal securities dealers,investment advisors and investment companies and their associated persons,if in effect at the time of the proposed 506 offering;

            5.         Suspension or expulsion from membership in,or suspension or bar from associating with a member of a securities regulatory organization if the suspension or order is still in effect at the time of the proposed 506 offering;

            6.         Commission Stop Orders entered within 5 years of the proposed offering and Orders suspending a Regulation A offering or if an investigation is being conducted into conduct that could result in a Stop Order,the 506 offering exemption would be prohibited;and

            7.         The entry of a US Postal Service false representation Orders within the past 5 years.

Accordingly,under the Rule,any securities offering that is associated with a “covered person” as defined above would be disqualified from the use of the exemption provided by Rule 506 if those “covered persons”  had committed any of the acts described above.  This limitation could create great hardship for issuers where a person peripherally associated with the offering has been involved with one of the disqualifying events listed.  A good example of this is the limitation on 10% shareholders.  Under the Rule,any shareholder that owns 10% of any class of securities would disqualify an issuer from the use of Rule 506 if he has been involved in a disqualifying event.  This could be especially troublesome for small issuers and start ups,where many of the owners involved in the startup process will generally own more than 10% of the company.

            Fortunately,in order to prevent hardship,the SEC has the authority to grant waivers “upon the showing of good cause and without prejudice to any other action”.  By using this power,the SEC has the authority under the Rule to waive any applicable disqualification under the proper circumstances.  The problem with this power is whether the process would be lengthy and expensive,thereby limiting its usefulness.

            In addition,the Commission has proposed a “Reasonable Care Exception” to the Rule,which would avoid the impact of the Rule for an offering where the issuer establishes that it did not know,and,in the exercise  of reasonable care,could not have known that a disqualification existed, because of the presence or attendance of a concerned person.

            It is important to note that the new Rule does not apply to investment advisors or the directors,officers,general partners or managing members of such investment advisors.

            All in all the new Rule creates some serious limitations on the ability of issuers to rely on one of the Commission’s most useful exemption from registration—i.e.  Rule 506–and it creates traps for the issuer,who could have the exemption declared unavailable after the fact,thereby subjecting  the issuer to liability for the sale of unregistered securities in violation of the Securities Act of 1933.  Accordingly,if the proposed Rule passes,future issuers will be required to be much more diligent in their knowledge of the rules and their knowledge of the background of the people associated with the offering.

            Fortunately,the new “bad boy” rules only apply to Rule 506 offerings.   This creates a planning opportunity for those  issuers who may have a “bad boy” associated with a proposed private placement. It will be necessary for these issuers to do their research in order to find  other exemptions at the state and federal level in order to conduct the securities offering and avoid  registration.

            The proposed Rule is still pending and it could be enacted in an alternative format,so future issuers should be alert to the final form of the rule that is enacted.

            Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer  with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at          .

Welcome to the Securities Law Blog

Welcome to the Securities Law Blog.  The purpose of this blog is to provide useful information to the securities industry,the business community and the public in general about securities law matters.  I hope to provide information that is useful to private companies,public companies,regulated entities,–such as investment advisers,and broker-dealers—as well as to those who are not immersed in securities issues,but who are interested in raising money for their business.  I will discuss matters such as private placements,public offerings,IPOs,venture capital,hedge funds,investment adviser issues,broker dealer issues,and compliance requirements faced by public companies.  As a prior SEC staffer with over 30 years in the private practice of law,I hope that I can use my experience to provide answers that can be useful in your day-to-day business,when you are planning to offer or sell securities in a private placement or a public offering,if you are establishing a hedge fund or if you are dealing with the more difficult issues that public companies face.  Likewise,I hope to provide basic and useful information to those who are not in the securities business,but who operate businesses that are impacted by the securities laws.  In light of the penalties imposed on those who violate the securities laws,it is very important to properly plan your actions and to have a thorough understanding of the securities law before embarking on transactions of this nature.

For over 30 years my practice has focused on securities laws and I hope I can use my experience to provide practical and helpful information to entrepreneurs,business owners,those in the securities industry,public companies,and regulated entities.  I also hope that my blog posts prompt some lively discussions and that these issues are debated and examined.

I look forward to the challenge,and I look forward to hearing from you.  If you have input,please leave a comment or if you would like to contact me directly,you may do so by email by using the email widget located on the left hand sidebar.

Richard W. Jones is an attorney with the Atlanta,Georgia law firm of Jones &Haley,P.C.,and he has over 30 years experience representing clients in securities law matters.  See our website at