The SEC finally lifted a ban that prevented hedge funds and
other private investment firms from advertising to the general public. As a result, companies will be allowed to
find investors and thereby raise capital through the general solicitation of
the public.
Under current securities law, companies seeking to raise
capital through the sale of securities are required to register the offering
with the SEC or rely on a suitable exemption from registration. Most of these
exemptions prohibit companies from engaging in general solicitation or general
advertising. The ban on general advertising has been place for more than 80
years, and is intended to safeguard smaller investors from taking on
potentially dangerous risks. The law, however, did permit advertising to high
net worth individuals or other sophisticated investors who could understand the
risks involved and bear a complete loss of their invested capital.
While the new rule will allow private issuers of securities
to widely solicit and publicly advertise, and potentially raise unlimited
amounts of money, the JOBS Act requires that SEC adopt rules that “require the
issuer to take reasonable steps to verify that purchasers of securities are
accredited investors.” So while there is no longer a restriction on who an
issuer can solicit, the restrictions on the qualifications of prospective
investors remain in effect. Currently, the “accredited” threshold is either:
(i) a net worth of $1 million (not including primary residence or any related
indebtedness), or (ii) annual income exceeding $200,000 (or $300,000 with a
spouse).
To read more about the SEC rules change, click here to read
Darren’s complete post on Prince Lobel’s Corporate Law Blog.