SEC Votes to Back Public Advertising for Private Placements

The Securities and Exchange Commission (SEC) voted yesterday to allow the issuers of private securities, such as hedge funds, to advertise their offerings and make solicitations to the public writes Dan Jamieson for InvestmentNews.com. This rule change is mandated under the "Jumpstart Our Business Startups Act."

Solicitation and advertising of private offerings, which would include the posting of information about deals on websites, would be allowed only when the product is sold to accredited investors.

Under Section 501 of SEC Regulation D, to be an accredited investor, a person must have an individual net worth, or joint net worth with a spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Alternatively, a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years may be considered accredited.

Jamieson writes that the rule proposal did not specify what methods issuers must use to ensure they sell only to accredited investors. Such verification methods “would be impractical and potentially ineffective," the SEC staff said in a release.

The regulator is proposing that the issuers consider the type of purchaser and what they know about them, how the investor was solicited and the terms of the offering, such as minimum investment. Observers have been debating exactly how such verifications should work.

The InvestmentNews.com article adds that the issuers have been urging the SEC to allow them to continue using signed statements from investors who claim they meet accreditation standards. State securities regulators are pushing the agency to require substantiation of financial status, such as tax and income records.

The commission had planned last week to implement immediately effective rules allowing solicitation of private products, but the Chairman backtracked on that idea after state regulators and investor groups complained about not having the normal 30-day comment period to air their views. That change of heart caused friction among the commissioners.

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