Depending on your perspective, lifting the ban on general solicitation and advertising for private offerings is one of the most anticipated or feared provisions in the JOBS Act. Consumer protection groups are aghast at the potential of fraud stemming from startup companies hawking their stock to unsophisticated investors. Pro-business groups are ecstatic that someone finally had listened to their complaints about the trouble entrepreneurs have raising capital once they have exhausted their family and friends. Well, after today’s Securities and Exchange Commission meeting, it looks like the pro-business groups got a further victory. Or did they?
This morning, the Commission proposed rules to implement Section 201 of the JOBS Act to remove the prohibition on general solicitation and advertising in private offerings when all purchasers are accredited investors. While removing a ban seems relatively simple, Congress instructed the Commission to write rules to “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”
What constitutes “reasonable steps” is the only difficult interpretation that the SEC had to make. There was some concern that the “reasonable steps” could be as harsh as requiring investors to prove their net worth through bank statements; however, the proposed rulemaking takes a much more flexible approach. The proposed rules require issuers to make an objective determination based on certain factors:
- The type of purchaser and the type of accredited investor that the purchaser claims to be;
- The amount and type of information that the issuer has about the purchaser; and
- The nature of the offering, including the manner in which the purchaser was solicited to participate in the offering and the terms of the offering such as the minimum investment amount.
The Commission didn’t set forth specific required verification methods because it felt a “one-size-fits-all” approach would be overly burdensome, impractical and ineffective. At first glance this seems like a very issuer friendly approach. Continue Reading Elimination of ban on general solicitation and advertising may leave some questions unanswered