SEC Ruling Creates Big Opportunities/Legal Pitfalls For Startups

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The SEC has adopted an amendment to Rule 506 of Regulation D that will allow startup companies to use general solicitation in their fundraising efforts. However, some legal experts, such as corporate securities lawyer, Erik Weingold, General Counsel to PPM Lawyers™ (, predict the new JOBS Act ruling will also create a myriad of legal pitfalls for unwary entrepreneurs.

Small business owners and entrepreneurs must have a clear understanding of the steps the SEC expects them to take in verifying investor status, and would be well advised to seek professional advice,

The SEC voted on July 10, 2013 to amend Rule 506 of Regulation D, removing an 80 year ban on general solicitation for non-public fundraising ( This is an unprecedented opportunity for startup companies formerly shackled by heavy regulatory burdens, “but it may also lead some entrepreneurs into legal hot water,” states Mr. Weingold, who in addition to operating PPM Lawyers, LLC, a leading provider of private placement memorandum (“PPM”) legal drafting services, is also advisor to PPM Fast, LLC (, a leading seller of PPM templates.

On April 5, 2012, the “Jumpstart Our Business Startups Act of 2012” (the “JOBS Act”) was signed into law by President Obama. The JOBS Act makes wide-ranging changes to the federal securities laws and rules governing the U.S. capital formation process. The primary goal of the JOBS Act is to expand and ease methods of capital raising by smaller companies, and to generally ease regulatory burdens. The rationale is that encouraging the growth and development of smaller companies and startups will lead to additional job creation.

However, a number of current and former SEC members, such as SEC Chairman Mary Schapiro, SEC Commissioner Luis Aguilar and former SEC Chief Accountant Lynn Turner, have criticized the JOBS Act for gutting investor protections that they believe will increase the likelihood of securities fraud ( The effect of the JOBS Act on capital raising will depend in large part on the choices the SEC makes in how it intends to scrutinize these types of offerings. “The key here is for startups to take great care in making full and proper disclosures in the form of a well drafted PPM, because the SEC anti-fraud rules will still apply under the new rules,” states Mr. Weingold.

Moreover, under the new rule, issuers must take reasonable steps to verify that their investors are accredited, steps that may not be readily apparent to the lay businessman. “Small business owners and entrepreneurs must have a clear understanding of the steps the SEC expects them to take in verifying investor status, and would be well advised to seek professional advice,” states Mike Scott, President of PPM Fast.

Ultimately, the JOBS Act amendments to Regulation D will likely be a boon to small businesses and entrepreneurs by allowing them to publicly access the accredited investor market. According to a July 2013 report by the Division of Economic and Risk Analysis (, created in September 2009 to integrate financial economics and rigorous data analytics into the core mission of the SEC, $903 billion in capital was raised through Regulation D offerings in 2012 from more than 234,000 investors, of which only 10% were non-accredited investors. Clearly, only a fraction of the potential for fundraising has been tapped. However, although the regulatory landscape has now been markedly liberalized, legal pitfalls still exist and new ones will surely develop for all but the most vigilant.

About PPM Lawyers, LLC and PPM Fast, LLC
Founded in 2005, PPM Lawyers is now the foremost web based PPM legal services firm, providing PPM drafting and review services, as well as related commercial practice services. Founded in 2002, PPM Fast is now the foremost web based PPM template vendor for use with Regulation D offerings. In 2010, PPM Lawyers and PPM Fast formed a strategic alliance to offer complete turnkey convenience with a competitive flat rate pricing structure for startup companies and small business throughout the U.S.

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