The Securities and Exchange Commission has voted (4-1, with Commissioner Luis Aguilar objecting) to allow the advertising and solicitation of private securities offerings by hedge funds, venture capitalists, and start-ups.
The Commission approved rule changes on Wednesday morning that facilitate the easing of those pre-existing restrictions, in accordance with a mandate of the Jumpstart Our Business Startups Act enacted in April 2012.
The JOBS Act directed the SEC to remove prohibitions on marketing securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act. These investment opportunities will now fall under the newly created category of 506(c) offerings.
The ability to expand solicitations beyond traditional channels, traditionally private correspondence and directly approaching investors with whom there is a pre-existing relationship, is not without restrictions.
The SEC amendments, effective 60 days after publication in the Federal Register, permit advertising and marketing only if issuers “take reasonable steps to verify” that all of the purchasers are accredited investors, with a verifiable a net worth of at least $1 million in liquid assets. An issuer soliciting new investors through a publicly available Website, social media, newspaper ads, or even billboards and infomercials, would be obligated to take greater measures to verify accredited investor status and ensure that investors are informed of potential risks and can withstand resulting losses.
Additional amendments will facilitate the Commission's efforts to evaluate market changes, positive or negative, that result from lifting the restrictions. Those changes (approved by a 3-2 vote) require a Form D filing with the SEC at least 15 days before a general solicitation offering. Additional notification, also using Form D, is demanded within 30 days of the completion of that solicitation. Issuers will also be required to provide detailed disclosures on the background of investors and the steps taken to verify their accredited status. Investor advocates have urged regulators to carefully monitor the effects of permitting general solicitation, in particular any increase in fraudulent activity.
Troy Paredes and Daniel Gallagher voted against the proposal for increased disclosures, citing concerns that they would be an added burden for issuers and potentially an impediment for investors, contrary to the intent of the JOBS Act.
The SEC also advanced an amendment that disqualify securities offerings involving certain "felons and other "bad actors" from taking advantage of the new opportunities.
Aguilar, although supportive of the concept, said the “Bad Actor Rule” had a “glaring weakness:” in that it will only apply to those that are disqualified in the future, if the event that triggers disqualification occurs after the effective date of the rule.
“It means that everyone who triggers the bad actor definition prior to sometime in September 2013 is free to participate in Rule 506 offerings on a going forward basis,” he said. “It is particularly disappointing that the Commission allowed this rule to languish for more than two years, while all too many “bad actors” received court orders or other sanctions that could have — but, now, will not — disqualify them from taking advantage of Rule 506 for years to come.”