The SEC has lifted an ancient ban that prevented advertising or the public solicitation of investors in private stock offerings. The new rule, which is part of the recent Jumpstart Our Business Startups Act of 2012, is meant to make it easier for hedge funds, private equity firms, and start-up businesses to find capital and create new jobs.
The new rule is intended to update outmoded securities law and reflect the vast changes that have occurred since the 1933 law went into effect as part of the investor protection laws during the Great Depression. Today many citizens have IRA and 401K investments which have made them more sophisticated about the financial markets and more likely to purchase stocks, bonds, or to make private investments in start-up businesses.
Importantly, the “general solicitation” of investors includes any announcement, publication, meeting, communication, or social media to which the public has access.
While the rule will make it easier for start-ups and small businesses to raise capital through private placement offerings, all such unregistered stock offerings will still be restricted to “accredited investors” (about 8 million individuals) who are sophisticated about financial matters, have a net worth of at least $1 million (excluding their primary residences), and have an annual income of more than $200,000 a year during the previous two years.
Under the rule, the “self-certification” of accredited investors is replaced by an evidentiary approach. Some complain that vetting possible investors will be time consuming and require extra due diligence on the part of companies, but it seems like a small duty compared to the benefit of reaching a larger field of investors.
Others complain that investors who must prove their accreditation may balk and claim that it is an invasion of piracy. Thus, many companies may forego general solicitation to avoid compliance with the new rules, and continue to offer their securities under the existing rules that allow angel investors to self-certify themselves.