The SEC voted on July 10 to implement a JOBS Act requirement that lifts the ban on general advertising for some private security offerings.
SEC chair Mary Jo White provided a bit of background on the action: “Under an existing provision of our securities laws — known as Rule 506 of Regulation D — companies can raise an unlimited amount of money through a private offering. But they are restricted in the way they can solicit investors, and they generally can only sell to accredited investors — that is, investors who meet certain financial thresholds.” The result has been a ban on generally soliciting investors for a private securities offering.
However, Title Section 201(a)(1) of the JOBS Act mandates that the SEC eliminate this ban so long as sales are limited to accredited investors. Doing away with this restriction will allow issuers to use “a number of previously unavailable solicitation and advertising methods when seeking potential investors,” White says.
The rule approved by the SEC allows issuers to use general solicitation to offer their securities so long as all purchasers of the securities are accredited investors or the issuer reasonably believes that the investors will be accredited investors at the time of the sale of the securities. The issuer also has to take reasonable steps to verify that the investors are accredited investors.
Accredited investors either have an individual net worth or joint net worth with a spouse topping $1 million at the time of the purchase, excluding their primary residence; or an annual income that exceeded $200,000 in each of the two most recent years ($300,000 for joint incomes), as well as a reasonable expectation of the same income level in the current year.
To determine if an investor is accredited, issuers can take several steps, such as reviewing copies of IRS forms showing the investor’s income and obtaining a written notice that the investor will earn the income required in the current year. The issuer also can get a written confirmation from a registered broker-dealer, investment adviser, attorney, or CPA who has taken reasonable steps to verify the purchaser's accredited status.
Of course, lifting the ban has prompted concern that would-be fraudsters will use the change to fleece unsuspecting investors. To address these, the SEC is proposing a new rule requiring issuers to, among other steps, file an advance notice of sale 15 days before and at the conclusion of an offering; currently, an issuer selling a 506 security has to file Form D no later than 15 days after the first sale in an offering. The rule also would require issuers to provide additional information to the SEC, such as the URL for the issuer’s website and the use of the offering’s proceeds.
The current and proposed changes have generated both compliments and criticism. The Managed Fund Association, which represents hedge and other investment funds, stated that it “supports the elimination of the prohibition on general solicitation for Regulation D offerings in a manner that will allow issuers to engage in general solicitation and take appropriate steps to verify that the purchasers of securities are accredited investors.”
Conversely, Americans for Financial Reform, a coalition of 250-some civil rights, consumer, labor, business, and other groups, issued the following statement: “Without real built-in investor-protection standards, we are seriously concerned that this rule will open the door to mass marketing of hedge funds and other risky and often illiquid ‘private’ securities in a market where abuses are common and SEC oversight is very limited.
The rule amendments will become effective 60 days after they’re published in the Federal Register. The rule proposal will undergo a public comment period of 60 days after it’s published in the Federal Register.