For the first time, hedge funds and others companies can advertise private offerings via the Internet, newspapers, magazines and other media outlets, under a rule approved today by the Securities and Exchange Commission.
However, only accredited investors with proof of high income or net worth provided by their personal financial advisor, attorney, accountant or broker-dealer could invest. To be eligible, an individual or couple would need a net worth of more than $1 million. The value of their primary home would not count toward that figure. Also eligible would be an investor with annual income exceeding $200,000 for each of the latest two years or joint income with a spouse of $300,000 for the same period.
Issuers would be required to take "reasonable steps" to verify whether investor meet the required eligibility standards. In addition, investors would need to have a “reasonable expectation” of meeting or exceeding the threshold in the current year. Investors coupld provide tax returns, brokerage and bank statements and a written statement that they expected their high income to continue.
About 7.4 percent of American households would qualify under the net worth criteria, according to Federal Reserve data.
Last year companies raised more money through private stock and bond placements ($1.652 trillion) than in public offerings ($1.204 trillion). The SEC’s action comes following Congress’s passage of the JOBS Act last year which mandated the regulator lift the general solicitation ban.
Businesses can start the advertising in about 60 days. However, they will be required to file a Form D with the SEC 15 days before they start soliciting public investors and amend it after the offering is either completed or withdrawn.
In another action, the SEC barred participation in private offerings from registered investment advisors, investment managers, principals of pooled investment funds and others who were convicted of securities law violations or subject to SEC discipline for activity after the next two months.
SEC Commissioner Elisse Walter said the new rules amount to a fundamental change in the way companies raise money in the private markets.
Democratic Commissioner Aguilar voted against them, saying the relaxation of the rules hurts Investors. “General solicitation will make fraud easier by widening the net of (investors),” he said.
Chairman Mary Jo White said the agency will be closely monitoring activity with the looser standards and additional investor safeguards could be enacted later.