The Securities and Exchange Commission is investigating whether some issuers of private placements properly vetted accredited investors, according to SEC Chairwoman Mary Jo White.
In a recent Q&A discussion at the 43rd Annual Securities Regulation Institute, held in late January in San Diego, White said that in relation to the SEC’s lifting of the ban on general solicitation under Rule 506(c) private offerings, “on the fraud/misconduct front,” the SEC has “some open investigations in several categories.”
One area, White said, “is actually in the area that is regulated, which is the reasonable efforts that issuers have to make to determine that who they’re selling to are accredited investors and either just not doing it at all or doing a job that clearly doesn’t pass muster.”
Rule 506 allows private placement offerings to accredited investors without the SEC filing requirements of a public offering. Rule 506(c), enacted under the Jumpstart Our Business Startups (JOBS) Act, allows public advertising of certain offerings.
Said White: “There are certainly, as you have in any market, some instances of fraud, but what we don’t see yet and hope we don’t, is evidence of rampant fraud in that market, obviously something we have to stay very vigilant about.”
White noted that while 506(c) is “being used, … it’s not being used perhaps as much as some would have thought it might be.”
Rule 506(b), she added, “where there isn’t general solicitation” continues to be “a hugely vibrant market.” From 2013, when 506(c) became effective, through 2015, White continued, “you had about $2.8 trillion sized market for 506(b) and about a $71 billion market for 506(c). So that gives you a sense of the difference in the use of those exemptions.”