SEC votes to end decades old general solicitation ban

Steven Loeb · July 10, 2013 · Short URL:

Startups, VCS and funds will now be able to publicly discuss and advertise investment opportunities

The Jumpstart Our Business Startups (JOBS) Act, which passed last year, was meant to ease restrictions on small businesses, in order to allow them to raise more money from more investors more easily.

One way the law did that was to relax restrictions on solicitation, turning back decades of laws that prohibited venture capital firms, private equity funds and hedge funds from marketing their investments to a wide audience by advertising them.

It took over a year, but the Securities and Exchange Commission finally decided to vote on these controversial proposals, and has passed them by a vote of four to one.

Now, these funds will now be able to publicly discuss and advertise investment opportunities, whereas they were previously prohibited from marketing their investments to a wide audience. In the past, companies were given an exemption on registering their offerings with the SEC in exchange for not advertising to the public. 

Fundraisers can now also publicize past performance, another thing that had previously been prohibited.

One thing has not changed: the funds would still only be allowed to sell securities to accredited investors. An accredited investor is one whose net worth is $1 million or more, or one who make more than $200,000 a year. 

Part of the reason that these general solicitation restrictions existed in the first place was to combat fraud, basically making it so that the fundraisers were not able to sell securities to those were are not qualified to participate in the offerings. But now that they are opening themselves up to a wider audience of potential investors, the fundraisers themselves will now be taking on the burden of making sure that they are dealing with actual accredited investors.

That means that the issuer will need documentation, such as a receipt of tax returns or bank account statements, to verify that they are dealing with an actual accredited investor. Previously investors could just "check a box" saying that they are accredited, and that was it.

The new rule also states that fundraisers will have to file a Form D with the SEC at least 15 days before they begin general solicitation, and they will also be required to file an amended Form D within 30 days after the offering is finished.

If the fundraiser does not follow these rules, the SEC has the right to ban them from subsequent securities issuance for at least a year.

The SEC also voted in favor of changing the Form D to include an investor "type," which will help them collect more data about how general solicitation is being used.

Of course, not everyone was happy about the restrictions being lifted.

"I believe that the proposal, presented under the guise of “investor protection,” would thwart the purposes of the JOBS Act and threatens real harm to the private markets that are so essential to capital formation, particularly for small businesses," Sec Commissioner Daniel Gallagher said in a speech denouncing the proposal on Wednesday. 

"Some aspects of the proposal might make sense and could result in the Commission gaining useful insights, but in the aggregate – and in particular given the nature and intent of certain questions posed – I believe the proposal would do more harm than good."

The proposal to end the restriction first appeared in the Jumpstart Our Business Startups (JOBS) Act, which was passed back in April. A big part of why the SEC decided to ease these restrictions seems to have to do with the rapidly changing technology allows information to be dispersed.

“In recent years, the need for the prohibition against general solicitation has been the subject of increasing debate, particularly in light of changes in communication technologies. New technologies have caused many to question the feasibility and continued desirability of communication restrictions in private offerings,” Mary Shapiro, Chairman of the SEC, said in her opening remarks when the SEC voted to invite public comment on the proposal to end the restrictions back in August 2012.

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