SEC Lifts Advertising Ban On Private Offerings

Washington, DC – The Securities and Exchange Commission today adopted rules that will allow businesses to use advertising to raise money through private offerings. The Commission action today carries out a mandate for such rules mandated last year by the Jumpstart Our Businesses Startups Act. The SEC also adopted so-called “bad actors” under the Dodd-Frank Act.

Under the JOBS Act, the SEC adopted in a close 3 to 2 vote amendments to eliminate the prohibition against general solicitation and general advertising in certain securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act.

In August 2012, the SEC issued a proposed rule to amend Rule 506 (well as the similar Rule 144A of the Securities Act) and permit these general solicitations as long as issuers “take reasonable steps to verify” that all of the purchasers are accredited investors.

The Commission also adopted amendments to disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on the exemption from Securities Act registration pursuant to Rule 506 as mandated by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  SEC Chair Mary Jo White urged the Commission to consider the two amendments in tandem to help implement the JOBS Act and safeguard investors.

SEC Viewpoints

SEC Chair Mary Jo White, who voted in favor of all provisions, urged the Commissioners to keep the JOBS Act mandate on track. “The Commissioners should act without delay,” she urged. In her vote in support of the general solicitation rules, Commissioner Elisse Walter pointed out “This will help issuers raise capital efficiently.”

Commissioner Luis Aguilar voted against the general solicitation proposals, criticizing the “reckless adoption” of the rules without providing adequate safeguards for investors.  Commissioners Dan Gallagher and Troy Paredes feared the general solicitation rules would thwart the purpose of the JOBS Act and place considerable burden on the equity market. “The proposals will do more harm than go,” said Commissioner Gallagher.

Timing

The SEC’s next step is to post the amendments on the Federal Register, which may take approximately two days, according to Sarah Hanks, CEO of CrowdCheck.com and former General Counsel of the Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). The SEC will note the effective date of each amendment on the Federal Registry, which could range from a minimum of 30 days to 90 days.

Keith Higgins, the SEC’s DIrector of Division of Corporate finance and other SEC staff members advised the Commissioners that they will develop a list of methods that private firms can use to ensure that offerings are only made to accredited investors, and internal procedures for the agency to evaluate verification practices.