It has been more than a year in coming (or 80, depending on how you’re counting) but the SEC, on July 10th, finally voted to lift the ban against general solicitation. As explained by Dina ElBoghdady in the Washington Post, in a matter of a few short months “hedge funds and others will be able to advertise to the masses via e-mail, billboards or even Facebook.”
The Dorsey Law Firm noted in a March 30, 2012 article, “[b]ecause of the absence of dollar limitations on offerings made under Rule 506 and the preemption of state regulation afforded such offerings, the vast majority of ‘private placements’ conducted today are specifically designed to comply with Rule 506 [of Regulation D under the 1933 Act]. And because no specific form of disclosure is required to qualify for the exemption in an offering made solely to accredited investors, most Rule 506 private placements are designed for sale solely to accredited investors.”
However, Rule 502(c) of Regulation D contains a prohibition against “general solicitation and general advertising.” The SEC’s action yesterday will now make Rule 502(c) inapplicable to Rule 506 offerings in which all purchasers are accredited investors. As explained in prior articles published on AIMkts, this result was dictated by the JOBS Act of 2012, and is probably the single most important aspect of that law. For an excellent set of commentaries and compiled resources about the JOBS Act, see the resources created and complied by Morrison Foerster.
Once the SEC’s rules eliminating the prohibition on general solicitation are in place, it is likely that we will see an entirely new practice of broadly disseminated offerings of various sizes to accredited investors, through the Internet and other media, as well as new service providers that facilitate this new form of quasi-public offering.
Financial Poise agrees. There absolutely will be an element of “Wild West” and there is real potential for abuse, as the JOBS Act’s detractors maintain.
Indeed, as USA Today pointed out in an article on on July 10th, the new rule eliminates “an 80-year regime of advertising restrictions intended to safeguard small investors from taking on potentially dangerous risk.” And we think that the concern voiced by SEC Commissioner Luis Aguilar (and reported by Bloomberg Business Week), that “[w]ithout common-sense protections, general solicitation will prove be a great boon to the fraudster,” is valid, though we disagree with his statement that “[e]xperience tells us that this will lead to economic disaster for many investors.”
At the end of the day, Financial Poise believes that the lifting of the ban is a good thing. The fact of the matter is that recent history shows economic downturns can be so deep and wide that a diversified investment portfolio consisting of stocks, bonds, and real estate is simply not diversified enough.
While the paternalistic policy behind the ban was well intended, it has effectively kept millions of Americans in the dark about legitimate and smart investment techniques. Our view at AIMkts is that if someone is sharp enough to earn $200,000 a year or amass $1 million in assets, she can probably be trusted to be sharp enough to invest her money. And, forgive me if this sounds too libertarian, but if she cannot then that is her issue.
The very fact that the news of the SEC’s vote was reported yesterday in USA Today is, in and of itself, a fantastic result.
Keep in mind, the new rule does not give anyone the right to invest in alternative investments who did not already have that right. It simply allows the purveyors of those investments to speak publicly about the opportunity and to contact people they do not know previously. What this effectively will do is enable people who are not “connected” (i.e. those members of country clubs, people who work on Wall Street, LaSalle Street, Silicon Valley) to start to be exposed to the same investment opportunities as those who are.
As Supreme Court Justice Louis Brandeis said in his 1914 book about financial reform, Other People’s Money, “sunlight is the best disinfectant.”
That is what AIMkts is about. It seeks to shine light on the topic of alternative investments for the benefit of the accredited investor. AIMkts has no other agenda. It carries no advertising from anyone trying to sell any sort of investment vehicle. AIMkts’s only mission is to offer free, objective education. Its contributors are recognized experts in their respective fields.
So, if you earn more than $200,000 ($300,000 between you, if you are married) per year or more than $1 million of assets (not including the value of your home) and are not fully knowledgeable about PE, VC, hedge funds, or other alternative investments, start reading Financial Poise today. Even if you decide to change nothing about your investment practice, you should understand enough to make an informed decision.
Jonathan Friedland is a partner with Sugar Felsenthal Grais & Hammer, a law firm with offices in Chicago and New York City. Born and raised in a New York suburb, Friedland graduated SUNY-Albany magna cum laude in three years and then earned his law degree from the University of Pennsylvania Law School. Friedland clerked for…
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