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SEC Lifts Private Placement Advertising Ban: How Will it Work?
Earlier this month, the Securities and Exchange Commission announced what promises to be a fundamental change in the way small business startups can raise capital from private investors. Before this change, SEC financial services regulations, particularly Rule 506 of Regulation D of the Securities Act of 1933, have prohibited solicitation or general advertising of private placements in an effort to seek capital investments. In an effort to comply with the Jumpstart Our Business Startups Act, or JOBS Act, the new rule will permit the advertising of private placement offerings as long as two conditions are met. To simplify: only “accredited” purchasers will be allowed, and no “bad actors,” as defined by the Dodd-Frank Act, will be allowed to advertise.
The background for this is the long-standing tradition prohibiting solicitation and advertisement under Rule 506, which applies to companies seeking to sell their securities under an exemption to the general requirement that such companies must register those securities with the SEC. Registered securities have had less restrictive advertising rules than do unregistered private placements.
Unfortunately, what that has meant for many companies seeking to offer private placements, such securities could only be sold to those with whom the company had a pre-existing relationship. In other words, often only existing investors, friends and family were qualified to buy in, which hampered companies from raising capital in this way.
With the advent of Twitter, Facebook and LinkedIn, and the more recent development of “crowdsourcing” or raising capital from innumerable small investors instead of a few larger ones, companies began to see the potential for massive capital investment through social media. To capture that potential and translate it into new jobs and a growing economy, the JOBS Act sought to make it easier for small companies and startups to crowdsource their capital.
The new SEC rule doesn’t go so far as to allow companies to advertise private placements through saturation marketing on Facebook, or even through crowdsourcing sites. The rule does require companies to take reasonable steps to ensure that only accredited investors (high net-worth or institutional grade) take part, and lays out a three-factor test to establish their accreditation.
So you should not expect to see a flood of TV or social media advertising involving private placements. The new rule, which has been criticized from a number of quarters, is called “final,” but there’s still time for public comment. The rule won’t officially go into effect until 60 days after its publication in the Federal Register, a date which has not yet been scheduled. The rule is, however, expected to go into effect sometime this year.
- The Huffington Post, "The SEC's Bluff on Lifting the Ban on General Solicitation and Advertising," Gary Emmanuel, July 16, 2013
- U.S. Securities and Exchange Commission, “Final Rule: Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings,” July 10, 2013