The Securities and Exchange Commission on Wednesday is expected to take action on a long-awaited provision of the Jumpstart Our Business Startups Act that would eliminate solicitation and advertising restrictions on hedge funds and private securities offerings.
The JOBS Act, enacted nearly 10 months ago, directed the SEC to remove prohibitions on marketing securities offerings by amending Rule 506, a safe harbor exemption contained in Regulation D of the Securities Act. By requiring the SEC to remove these restrictions, Congress sought to make it easier for companies to inform the public that they are seeking to raise capital through the sale of securities.
In August 2012, the SEC issued a proposed rule to amend Rule 506 (well as the similar Rule 144A of the Securities Act) and permit these general solicitations as long as issuers “take reasonable steps to verify” that all of the purchasers are accredited investors.
As proposed, an issuer soliciting new investors through a publicly available Website, social media, or newspaper ads and billboards would be obligated to take greater measures to verify accredited investor status. Under its proposed rule, the Commission says issuers should consider a number of factors, including: the nature of the purchaser and the type of accredited investor that the purchaser claims to be; the amount and type of information that the issuer has about the purchaser; and the nature of the offering. It stopped short of requiring “uniform verification methods,” with the stated intent of giving issuers and market participants “the flexibility to adopt different approaches” and adapt to changing market practices.
Investor advocates, among them SEC Commissioner Elisse Walter, have said that regulators will need to carefully monitor the effects of permitting general solicitation, in particular any increase in fraudulent activity. It will be crucial, Walter has said, to ensure that investors are properly screened and have the knowledge and information needed to fully understand the risks of their investments.
Concerns were also voiced that the initial guidance for screening accredited investors is overly broad. In a comment letter to the SEC, the Hedge Fund Association pointed out that because the proposed regulations ask for managers to take “reasonable steps,” without defining which steps are sufficient, they could create administrative burdens and uncertainties for private issuers. Managers need to know that what they are doing is legal before they will take advantage of the new opportunities presented, it wrote. The group urged the SEC to define a safe harbor provision within the regulation to eliminate managers' liability in connection with verifying investor accreditation if they have done so within defined standards.
Even if the SEC approves the amendments before it on Wednesday, key pieces of the JOBS Act will still be left in limbo. The SEC has yet to finalize provisions that would allow crowdfunding, which lets companies raise up to $1 million over 12 months from an unlimited number of investors without hitting filing requirements. It has also not yet acted on raising the limit for securities offerings exempted under Regulation A from $5 million to $50 million.