NASAA Sounds Alarm on Private Placement Offerings

As SEC finalizes JOBS Act rule lifting marketing ban, state regulators renew worries

As the Securities and Exchange Commission prepares to end the ban on general solicitation of private placement offerings, state regulators issued an alert Tuesday warning investors about the risks in such sales.

As it stands now, Rule 506 of Regulation D of the Securities Act of 1933 does not permit general solicitation or advertising of private placement offerings. However, the JOBS Act directs the SEC to lift this ban as long as the sales are limited to “accredited” investors—those who have sufficient wealth or access to information that would presumably allow them to make completely informed investment decisions.

While there’s no official date set for when the SEC will finalize the rule, SEC chairwoman nominee Mary Jo White stated at her Senate Banking Committee confirmation hearing March 12 that making the remaining rules under the Dodd-Frank and JOBS acts “in as timely and smart a way as possible” would be her top priority at the agency.

As NASAA explains, private placement offerings allow companies to raise money by selling stocks, bonds and other instruments. These offerings may be exempt from federal securities registration requirements. This exemption allows a company to raise business capital without having to comply with the registration requirements of a public securities offering.

Heath AbshureHeath Abshure (left), NASAA president and Arkansas securities commissioner, said in a statement that state securities regulators were “concerned that Main Street investors will be lured into high-risk or fraudulent investments when the ban on general solicitation of private placement offerings is lifted.”

Once implemented, NASAA says that the SEC’s rule will allow companies and promoters to offer securities through direct mail, cold calls, free lunch seminars and television or radio commercials. “As a result, unscrupulous companies and promoters may take advantage of the new rules to offer potentially fraudulent investments,” NASAA’s advisory says.

Because private placement offerings made in reliance on Rule 506 of Regulation D are not reviewed by regulators, they have become a haven for fraud, NASAA says. For the second consecutive year, NASAA said in October that Regulation D Rule 506 private offerings were one of the most reported products “at the heart” of state securities enforcement actions.

The NASAA advisory includes information on the risks associated with private placement offerings and tips on how investors can protect themselves when considering such an offering.

“Rule 506 has been used by legitimate small businesses as an important source of capital, and state securities regulators want those businesses to be able to thrive and create jobs without unnecessary regulatory impediments,” Abshure said. ”However, a healthy private placement marketplace requires investors who feel adequately protected.”

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