The Securities and Exchange Commission will next Wednesday vote
to lift a ban persuant to Rule 506 of the Securities Act of 1933
which stops private funds from advertising to raise
capital outside of a public offering, Bloomberg reports.
Abolishing the ban is required under the 2012 Jumpstart Our
Startups Act, established to help startups and small business with regard to
financing regulations. As highlighted by the news service, critics
argue that lifting the ban will expose small and/or inexperienced investors to fraud
as a result of loosened investment protections.
According to Bloomberg,
state securities regulators say private placements were the most common
product leading to enforcement actions in 2011. It
added that the initial proposal did not outline clear methods to verify that a person
was qualified to invest. This has triggered complaints from consumer groups and
hedge funds, which it highlighted are "some of the most active entities lobbying to shape the rule."
In response, the SEC reportedly said that it will also propose a
separate rule to include some
investor protections and make it easier for the authority to monitor the
change. Meanwhile, a third rule would block offenders and
others found culpable of securities law violations from marketing such deals.
"The package of rules will allow the SEC to finish an overdue
assignment from Congress, while seeking to assuage critics such as
consumer groups and state securities regulators who decried the SEC’s
initial plan for lifting the ban last year," the news service said.
As explained on the SEC’s website, firms seeking
to raise capital through the sale of securities must either register the securities
offering with the SEC or rely on an exemption from registration. Most exemptions
bar firms from engaging in a general solicitation/advertising in connection
with securities offerings (advertising in newspapers or on the Internet, among
others), with Rule 506 (of Regulation D) being one of those exemptions.
The JOBS Act directs the SEC to remove the
prohibitions on general solicitation/advertising for securities offerings
relying on Rule 506. Companies using the Rule 506 exemption can raise an unlimited amount of money.
However, they must satisfy a number of standards, which includes a ban on advertising securities and ensuring that firms serve only accredited or "sophisticated" investors.
Click here to view an article providing guidance from law firm Withers on the implications of the JOBS Act and what it means for capital-raising by firms and operating companies.