The Stop Trading on Congressional Knowledge Act (STOCK) has now passed both the U.S. House and Senate and should be signed into law by the president very soon. (Actual Text | Bill Summary & Status) H.R. 1148 or Senate Version S.1871 is the bill that seeks to impose heavier restrictions on insider trading that is done by or is connected to members of congress, federal employees, or employees of congress. Insider trading is covered by the Securities Act of 1934 and other related federal legislation and rules by the SEC and CFTC. It occurs when someone uses inside information as a basis to trade in stocks, commodities, or other types of securities. Inside information is defined as material non-public information. An example would be someone who works for a public company, gains information about something about to happen with that company that has not been disclosed to the public (e.g. significantly increased profits, new products about to be launched, etc.), and trades based upon that information.
Good discussion in this link about the implementation of Dodd-Frank when it comes to the SEC ruling on attempts by public companies to limit what they have to do to allow shareholders to add nominations to proxy materials.
Kickstarter is one of the main examples of a crowdfunding type of company. It solicits money to help fund new projects or companies. So is this general advertising, solicitation, and funding by a non-broker/dealer or intermediary that is not allowed by law? Yes and no.
The SEC published a proposed rule promulgated under Dodd-Frank to deal with issues of identity theft when dealing with broker/dealers, investment advisors, and other investment professionals. The rule would require SEC regulated entities to implement written identity theft policies and procedures to ensure investors’ identity remains confidential. It uses what they call a program of “red flags.”
There is a 60 day comment period before the rules would go into effect from the February 28, 2012 publish date.
There are definitely pros and cons with both HR 2930 and 2940. Having been in the position of a cash-strapped start-up trying to raise money, I can see the huge benefit of the changes for raising cash from small investors with intermediaries (basically a “finder”) and advertising rules. However, the lack of disclosure requirements could allow for fraud on potential investors and not enough oversight.
I am a little surprised I don’t see more posts regarding these from other corporate, startup, or securities lawyers. Here is a link to a good discussion on HR 2930 by the Securities Law Prof Blog.
Given that it appears that both HR 2930 and 2940 may pass the US Senate and be signed by the president and the recent recommendation by the Advisory Committee on Small and Emerging Companies for the SEC to make similar changes to SEC rules for 506 Reg D private placements, it appears these changes may take effect in the next several months. It may have some negative consequences on investors, but I think it will help with small startup companies fund raising abilities. There will be some work for corporate and securities lawyers to interpret and help companies implement these changes in the near future.
Stay tuned, I will try to keep track of the progress of these bills and provide updates as available on my blogs. barsnesscohen.blogspot.com and chrisbarsness.tumblr.com Twitter: @BarsnessLaw | www.siliconvalleystartupattorney.com