SEC Approves Advertising for Private Placements

In a 4-1 vote, the Securities Exchange Commission (SEC)  approved a rule that would now allow broker-dealers, hedge funds, and private equity firms to advertise to the general public for private placement securities offerings.  Firms are still limited to sales to accredited investors. Accredited investors are defined as those who have a net worth of $1 million, excluding the value of the investors primary residence, or earning at least $200,000 annually. According to Investment News, there are 9 million homes in the United States that meet this standard.

The SEC’s new rule will require that private-placement issuers take reasonable and appropriate steps to assess an investor’s qualifications and ability to meet the accredited investor standard. According to the SEC, the broker may have to independently verify that the client meets the appropriate standards.

The new rule will give funds the ability to publicly solicit private investments. The SEC’s rule is an implementation of the Jumpstart Our Business Startups Act enacted by Congress in April 2012. Will the law help entrepreneurs raise capital or will investors lose another level of protection? Only time will tell.

Any firm that advertises for private securities will have to file a Form D 15 days before the offering. Failing to submit the form may, in some circumstances, disqualify the issuer from proceeding with the offering.

According to Investment News, Mary Jo White, head of the SEC, asserted that the package of final rules and the investor-protection proposal strikes the right balance. “I believe the commission should closely monitor and collect data on this new market to see how it in fact operates, observe the practices issuers and market participants are using and assess whether and to what extent the changes in the private offering market has led to additional fraud,” Ms. White said.

According to the SEC, in 2012, private securities offerings raised approximately $1.6 trillion. That compares to $1.2 trillion raised through the sales of public securities.

“The decision to lift the ban without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection,” A. Heath Abshure, Arkansas securities commissioner and president of the North American Securities Administrators Association, said in a statement.

Gana Weinstein LLP can help you if you believe that you have been the victim of investor fraud or have been recommended an unsuitable private placement.

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