In this edition of A Difference of Opinions, two attorneys sound off about the SEC adoption of a mandate in the JOBS Act of 2012 that permits general solicitation in private securities offerings. We reached out to two attorneys with different backgrounds just to get a better idea of what this update might hold for the future of promotional activities among investors and those wishing to raise money.
And You Thought Law Firm Advertising Was Bad?
By: Wayne Patton, Esq, an asset protection, business, finance and estate planning attorney. Wayne’s firm is based in Miami, Florida, and he can be contacted through his website.
In March of 2012 the Jumpstart Our Business Startups Act (the “JOBS Act”) became law. The purpose of the legislation simplifies the process of business fundraising. The law specifically touches investment firms like hedge funds and private equity funds, which have traditionally struggled to “get the word out” under the previous stifling rules that prohibit “general solicitation” under the Securities Act of 1933.
Though it took more than a year for the SEC to approve rules implementing the JOBS Act, we now officially have a framework on which to rely. There are a few things you should know before you start urging clients to advertise openly.
First, while general advertising and solicitation is permitted under the new rules, the “accredited investor” rules regarding unregistered security offerings are still in place.
Also, with the permission to generally solicit comes more responsibility. Specifically, the burden of proving “accredited investor” status has shifted. Under the new rules, investment firms need to ensure that investors are actually accredited.
The next logical question is “Just how inundated will we be with fund advertising?” You thought lawyers were bad. Just wait…
Adoption of New Rule 506(c): General Solicitation in Regulation D Offerings
By: Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field.
On July 10 the SEC complied with a mandate in the JOBS Act of 2012 to permit “general solicitation” in private securities offerings. In doing so, the SEC created an entirely new type of securities offering not required to be registered under the Securities Act of 1933.
The SEC adopted amendments to Regulation D under the Securities Act to add new Rule 506(c). Rule 506(c) offerings are technically private placements, made only to “accredited” (rich) investors. In the past this has meant not just that accredited investors only could buy the securities, but also that the issuer could offer them to accredited investors only.
Under the new rule, small companies and private investment funds and their intermediaries will be able to use “general solicitation” to reach accredited investors, which means they may advertise or publicize an offering on television, in newspapers, and most importantly over the internet. They may talk about the offering on talk shows and webinars, and they may promote the offering on social media.
This is a big change. But companies planning to take advantage of the ability to make public solicitations (and their advisers) should bear in mind that something that hasn’t changed is the application of the securities anti-fraud laws to all statements made in connection with the sale of securities. And for that reason, this new type of offering might not be as game-changing as some think.
Proponents of the new rule believe that it will increase transparency, make it easier for small companies to raise capital and decrease companies’ administrative costs. Opponents worry that, in the words of SEC Commissioner Aguilar, removal of the prohibition on general solicitation would be “a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult.”
Awareness of fraudulent promotional activities means that prospective issuers and their advisers will have to be very careful about the accuracy and completeness of any statements they make. Will the rule change mean that we see hedge funds advertising on late-night TV or Twitter campaigns for investments in startups? The impact of the new rule is likely to be more limited in that respect than some have predicted. Public registered mutual funds do advertise, but those advertisements tend to be staid and contain lots of “fine print” disclaimers prescribed by law; private funds will likely be just as constrained. Broker-dealers putting together Regulation D deals are already subject to FINRA rules with respect to their advertising and social media use, and these requirements have not changed. The anti-fraud laws discussed above should have a tempering effect on any overly-exuberant publicity attempts in either paid or social media.
And the SEC will be watching. The SEC has established a “Rule 506(c) Work Plan” involving staff from all across the SEC, who will monitor the new Rule 506(c) market for fraud and compliance and to coordinate with state regulators.
The effective date for the new rule is September 23, 2013. Rule 506(c) offerings will only be legal after that effective date.