On April18, 2012, the SEC, jointly with the Commodities Futures Trading Commission (CFTC), implemented part of the Dodd-Frank Act by adding definitions for use in interpreting what are swaps-related transactions.
The new Rule 3a71-1 under the Securities Exchange Act defines the term “security-based swap dealer” consistent with the criteria set forth in the Dodd-Frank Act as someone who:
- Holds themselves out as a dealer in security-based swaps.
- Makes a market in security-based swaps.
- Regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account.
- Engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.
There is an exception for those who are only involved in a de minimis quantity of these transactions to not be held to this rule. The rule will go into effect 60 days after the rule is published in the Federal Register.
You can read the entire release and rule through the SEC’s website at:
I have noticed quite a bit of confusion in blogs when discussing crowdfunding, the JOBS Act, and other recent legislation regarding small business, startups, and emerging growth companies. Even respected news organizations don’t get the specifics exactly right about what this legislation actually says, so I thought I would set the record straight.
President Obama is set to sign H.R. 3606 this week. The best way to know exactly what this bill says is to read it, despite the somewhat dense language and references to other parts of U.S. law. Here is a link to the actual PDF format of H.R. 3606. This is an easier to read version I put together on my site with hyperlinks to each section. For an overview and summary of this bill and its history you can read here. These are links directly to the information provided by Congress. Some of the confusion has been that the legislative process involves a very confusing system where bills are introduced, amended, and sometimes added to existing bills. That was the case with the JOBS Act and the crowdfunding provisions. H.R. 2930 was the original crowdfunding bill that passed the U.S. House and went to the Senate, but did not actually pass the Senate. After adding and deleting portions from various amended versions similar to H.R. 2930, the crowdfunding and other provisions were all put into one bill called H.R. 3606. This passed the Senate and then went back to the U.S. House after amendments to be passed. It has passed and was forwarded to the President for signature on March 27, 2012. He is expected to sign it this week.
With H.R. 3606, or most commonly referred to as the “JOBS” Act (Bill Summary | Bill Text PDF), likely to be signed into law this week by President Obama, there are some new changes that may be of help to startup and small companies. In addition to the so-called crowdfunding exemption from securities registration which allows pooling of small amounts from investors to fund a company, the JOBS Act puts in place regulations that carve out a category called “emerging growth companies” which have an intermediate level of reporting obligations with the SEC. It is between the level of disclosures required for a fully reporting large company and a private, non-reporting company. This could be a very good help for these small to middle market companies to ease the burden of time and expense in being a fully reporting company.
One question faced by companies from startup through Fortune 500 status is whether they should stagger or classify their board of directors. Staggering or classifying occurs when the corporation sets up voting for election of only a minority of members of the board every year, so it often takes several years to replace an entire board. This is viewed as a good takeover defense and also argued to be good for the corporation because frequent changes of directors can result in corporate policy and corporate governance changing more often or more dramatically. Those against it feel that it doesn’t give shareholders the ability to make major changes when problems arise with the current board’s decisions and it entrenches existing corporate policy and management to not as easily allow for necessary change. Although some would downplay trying to make this about shareholder rights versus management or existing structure, that is a major factor of the argument.
H.R. 2930, one part of the multi-bill JOBS Act being pushed through Congress, was to allow more eased securities regulation of so-called crowdfunding. Some have argued that sites like Kickstarter or others could change their business model (currently only accepts gifts or donations, called pledges, to raise money) to help companies raise money for companies in exchange for stock in that company. Currently, that model would be prohibited under securities laws as general advertising and public sales of stock are not allowed, especially through an intermediary, with certain exceptions like using a registered broker-dealer or registering the stock with the SEC.