SEC lifts ban on general solicitation
The Securities and Exchange Commission (SEC) voted 4 to 1 to lift an 80-year-old ban on advertisements of private offerings on July 10, 2013.
“We welcome the SEC’s lifting of the ban on ‘general solicitation’ and the opportunity to more openly discuss our business in appropriate forums, including discussions at industry conferences and with the press,” says Mike McMenomy, global head of investors services at CBRE Global Investors. “Enabling investment managers to more freely share information about fund offerings will benefit accredited investors by giving them access to the broadest range of information about programs in which they are interested and qualified to invest.”
The Jumpstart Our Business Startups Act of 2012 (JOBS Act) required the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in private placements as long as all purchasers are accredited investors. The new rule will take effect 60 days after the SEC publishes it in the Federal Register. However, companies will still have to verify that securities are sold only to accredited investors.
“Lifting the ban on advertising by hedge funds, start ups and other private investment companies in their fund raising activities is not likely have a big impact on large established companies, since they already have a solid investor base, nor is it likely to impact how large, institutional investors such as public pension funds select investments," says Amy Wells, a partner at Cox, Castle & Nicholson. "However, the rule change may have a significant impact on start ups and smaller companies, since they’ll now be able to increase their exposure to investors.”
In a statement, the Hedge Fund Association (HFA) noted, “though HFA views this development as generally positive, we await publication of the new rules to determine whether particular requirements impose an unnecessary burden on our members.”
The SEC also has voted to issue new rules containing stronger investor protections. These include requiring issuers who take advantage of the new advertisement rules to provide additional information about their securities offerings and provide more information about their investors. In addition to other current requirements, investors would be required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering and within 30 days of completing an offering, and issuers would be required to update the information contained in the Form D and indicate that the offering has ended. The SEC also adopted rules that would disqualify felons and other bad actors from participating in Rule 506 offerings.
“As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the commission must always focus on strong investor protections,” Mary Jo White, chairwoman of the SEC, said in a statement. “We want this new market and the private markets in general to thrive in a safe and efficient manner, and these rules we adopt and propose are designed to facilitate that objective.”
This will fundamentally alter the marketing landscape for EB-5 projects by allowing project companies to solicit investors through social media, press releases, newspapers, billboards and other traditional marketing campaigns. While it remains to be seen whether this will make it easier for EB-5 projects to raise money, the new rule changes will certainly allow EB-5 projects to reach more potential investors.
The JOBS Act, signed into law by President Obama in April 2012, allows new opportunities to invest in small start-up companies that previously were available only to the wealthiest Americans. Supporters of the law say that, by expanding the limits on what small public companies can raise and the number of investors they can have, and by allowing general advertising of private investment opportunities, the JOBS Act makes it possible for millions of Americans to invest directly in the future.
In his speech announcing the JOBS Act in April 2012, President Obama said, “for start-ups and small businesses, this bill is a potential game changer. ... Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors — namely, the American people.”