In 4-1 vote, commission greenlights marketing of Reg D offerings to credited investors; advisers stuck in the middle?
The Securities and Exchange Commission approved a rule today that would allow advertising for private-placement securities offerings. In a 4-1 vote, the commission opened the door for private equity and hedge funds as well as brokers selling unregistered securities to market to the general public.
The sales would be limited to accredited investors, who are defined as those who have a net worth of at least $1 million, excluding the value of their home, or earn at least $200,000 annually. Nearly 9 million U.S. households meet the net-wealth criteria to be accredited investors.
Indeed, as the wider public is introduced to private securities offerings, investment advisers are likely to see more demand from clients for these opportunities. That puts them in a key position to evaluate the often risky ventures.
“It does put more onus on an adviser to make sure someone is an appropriate investor,” said Jennifer Openshaw, president of Finect, a compliant social media network for the financial industry. “Today, it's easy to meet the $1-million threshold as an accredited investor. But that doesn't mean they're sophisticated.”
The advertising rule will require that private-placement issuers take reasonable steps to assess an investor's qualifications. One check, according to the SEC, would be a written confirmation from a broker-dealer or an investment adviser. “An investment adviser may be called on to provide [third-party] verification,” said Brian North, a shareholder at Buchanan Ingersoll & Rooney P.C.
One adviser said he does not plan to recommend private placements to his clients if they make an inquiry after seeing an ad. “I find it impossible to do what I consider adequate due diligence,” said David Mendels, director of planning at Creative Financial Concepts LLC.
The new rule will give private funds more latitude to make pitches at conferences and to speak to the media. But don't look for them to hit TV and radio airwaves, according to Adam Gale, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo PC.
“Most funds probably will not do any broad advertising because, at the end of the day, you can only access qualified purchasers,” Mr. Gale said. “They might want to do more targeted advertising in publications that are for high-net-worth individuals.”
The SEC's action implements a provision of a law that was enacted in April 2012 after overwhelming bipartisan approval in Congress – the Jumpstart Our Business Startups Act. The measure eases securities regulations for small companies.
Supporters have said all along that the law will help entrepreneurs raise capital. Critics say that the SEC is lifting the advertising ban without including sufficient investor protections. SEC Chairman Mary Jo White tried to thread the needle in Wednesday's meeting by offering a separate regulatory proposal that would tighten the rules surrounding private placement solicitation.
Among other things, that plan would require anyone advertising private securities to file a so-called Form D 15 days before the offering instead of the current requirement for filing by 15 days after the offering. Failing to submit the form would disqualify the issuer. The proposal also would require issuers to provide additional information, including a website address and background on the securities offered, the types of investors participating in the offering and the use of the proceeds from the offering.
Ms. White asserted that the package of final rules and the investor-protection proposal strikes the right balance. She emphasized that the latter would help the SEC keep its eye on how the private-placement market is affected by the advent of advertising.
“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.
But one commissioner, who opposed lifting the 80-year-old advertising ban, was skeptical about the potential investor safeguards. “Any protections from today's proposal will come too late – if they ever come at all – for investors,” said SEC member Luis Aguilar.
The difficulty that the investor-protection proposals face was demonstrated by the opposition from commissioners Troy Paredes and Daniel Gallagher Jr. “The proposal, if adopted, would undermine the Jobs Act goal of spurring our economy and job creation,” Mr. Paredes said. Mr. Gallagher added that the plan “threatens real harm to the private market…particularly to small businesses.”
In 2012, about $1.6 trillion was raised by private securities offerings, according to SEC staff. That compares to $1.2 trillion raised through the sales of public securities.
Although she supports considering more investor protection, Ms. White said the SEC must meet the congressional mandate to implement the jobs legislation. “I am firmly committed to keeping consideration of this proposal on track so that the Commission is able to make an appropriate and timely regulatory response to the operation of the new rule permitting general solicitation,” Ms. White said.
Mr. Aguilar countered that the commission was moving ahead “recklessly” and was “allowing fraudsters to cast a wider net” through private-placement advertising.
One state regulator agreed.
“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.
