JOBS Act and Congress Force the SEC to Go “Down the Rabbit Hole” of Mass Marketing.
The SEC’s recent vote changes the rules on the marketing of so called private placements or those securities not involved in a public offering.
This changed an 80 year prohibition on so-called general advertising or general solicitation, which generally speaking amount to broader types of marketing. So long as the investments are only sold to accredited investors, there is now no need for a pre-existing personal or business relationship between the issuer’s principals, internal marketers and broker-dealers (BDs) selling the offering of the fund.
Generally speaking, an accredited investor is the one with more than a one million dollar net worth, excluding home equity or one having incomes above $200,000 for individuals and $300,000 for couples. According to the SEC, 7.4% of U.S. households meet the definition of accredited investor according to the net worth definition. Under the amended Regulation D, the issuer of the private securities can no longer satisfy the accredited investor qualification by a “check the box” response. Now, issuers must take steps that amount to “reasonable verification of income and/or assets.” Issuers/Funds can review tax returns to substantiate the purchaser’s income or get confirmation of a person’s net worth or income by obtaining it from a registered broker-dealer (B-D), registered investment adviser (RIA), licensed attorney or a CPA.
The JOBS Act itself was passed in April 2012. The Congressional deadline for the SEC to implement the JOBS Act expired more than 1 year ago. Nevertheless, the SEC has implemented the changes that will now allow for certain crowd-funding- type features to be used by issuers of securities.
Hedge funds, venture capital and private equity funds seemed to have “sneaked passed the bouncer,” as the impetus behind the change according to the JOBS Act was ease of raising capital and thus boost employment. It remains doubtful that loosening the rules on marketing by hedge funds, venture capital and private equity funds will lead to any additional hiring. The change in the marketing rules amount to a “sea change” when one considers that last year, the amount of private capital raised in the U.S. was just under 900 billion dollars.
The new rule takes effect sometime in mid-September 2013.