The SEC on Wednesday, July 10, 2013, voted 4 to 1 in favor of implementing section 201(a) of the Jumpstart Our Business Startups Act (“JOBS Act”). Section 201(a) eliminates the previous restriction on advertising, which was intended to safeguard small investors, by allowing startups, venture capitalists, and hedge funds to openly advertise that they are raising money in private offerings. The advertising ban will officially end 60 days after the rule is published in the federal register.
The SEC implemented section 201(a) of the JOBS Act by amending Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933. The amendment to Rule 506 permits an issuer to engage in general solicitation or general advertising, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors. Accredited investors are generally those with a net worth of more than $1 million, excluding the value of one’s primary residence, or more than $200,000 in annual income for the past two years. Hedge-fund investors have to meet a net-worth threshold of at least $2 million, excluding their primary residence.
The SEC will move to create a new class of offering, called a Regulation 506(c) offering, which allows general advertising while disallowing any and all participation by non-accredited investors. To be in compliance with the new regulation, companies must provide advance notice to the SEC 15 days before an offering will be publicized and file a Form D within 30 days of an offering being completed. Companies that fail to provide advance notice will be disqualified from making new private offerings for one year. Furthermore, firms must provide the SEC with additional information about their offerings.
Lifting the advertising ban will grant firms greater flexibility to raise capital and minimize costs associated with locating and using investors. The new rules allow companies to use creative marketing strategies through television, billboards and social media to bring in more capital and thus greater expansion. Advertising will also minimize the hold that large institutional investors can have within industries, and therefore more capital can flow to any and all industries. The SEC estimates that over $900 billion was raised for private offerings in 2011 alone. That number will likely dramatically increase with firms now able to cast a wider net for investors.
What Does This Mean for You
The SEC did not foreclose the possibility of implementing future regulations with respect to advertising. If you or your company is looking to raise capital through private offerings, or needs help with SEC compliance, contact our office to discuss your options with our experienced attorneys.