Last week, the SEC finalized rules which reverse the longstanding ban on the general solicitation of unregistered securities offerings. Otherwise known as private placements, these offerings are conducted pursuant to the Regulation D exemption under the securities registration rules, and are generally considered suitable for sophisticated investors only.
The capital markets welcomed the long awaited relief, in anticipation that the JOBS Act legislation signed in April, 2012 will increase the flow of investment capital. The biggest winner of last week’s announcement were hedge funds, which will avail themselves of new rule 506(c), permitting such private funds to advertise interest to the investing public using a variety of mediums. However, despite the loosening of the advertising ban, only accredited investors will be permitted to purchase these hedge funds, thereby limiting investments to individuals that meet minimum financial criteria. Currently, $200,000 annual income ($300,000 if married) and $1,000,000 net worth (excluding the value of primary residence).
The ruling was not without detractors as many believe fraud and investor harm will be the unwelcome consequence. We strongly recommend that financial services firms involved with private offerings assess their compliance systems. It is essential that strong controls are in place to prevent non-accredited investors from purchasing these offerings. You can rest assured the regulators will be reviewing such practices when they visit for routine examinations.
To read the full SEC release, go to http://www.sec.gov/news/press/2013/2013-124.htm.