From a securities compliance perspective, when
you see an advertisement or an email seeking capital for an investment
opportunity there is most likely a problem. Now there is a bill in Congress
that would change that view.
When selling a security, you need to register the
security or find an appropriate exemption from registration. Most likely a
private fund or an entrepreneur would try to fall under one of the exemptions
under Regulation D. If the company is seeking over $1,000,000 they
are prohibited from offering to sell the securities "by any form of general
solicitation or general advertising". Before asking someone to make an
investment, you need to have a preexisting, substantive relationship.
"The types of relationships with offerees that may be
important in establishing a general solicitation has not taken place are those
that would enable the issuer (or a person acting on its behalf) to be aware of
the financial circumstances or sophistication of the person with whom the
relationship exists or that otherwise are of some substance and duration." Mineral
Lands Research & Marketing Corp., S.E.C. No-Action Letter, 1985 WL 55694
(Dec. 4 1985).
Kevin McCarthy (R-CA) introduced the Access to
Capital for Job Creators Act (HR 2940) which require the Securities and
Exchange Commission to revise its rules to permit general solicitation in
offerings under Rule 506 of Regulation D.
In my view, I don't think there should be an elimination
of the ban on general advertising and general solicitation. That would just
expose large segments of the population to potential securities fraud.
Currently, ads for investment opportunities are red flags for state and federal
However, I do think it needs to a little easier for
entrepreneurs to raise capital. The SEC should offer some better guidance on
the limitation. They could also offer some programs and safe harbors. I assume
the SEC is waiting for someone to approach them with examples. They continue to
be too underfunded and too understaffed to be proactive.
Will the Access to
Capital for Job Creators Act be enacted? I doubt that it would pass in its
current form. It takes away some investor protection and warning system for
securities regulators. That would seem a bad position when the country is
stealing trying to recover from the massive losses of 2008.
See also: Alexander Davie-Rep. McCarthy (R-CA) Introduces Legislation to Eliminate Ban on General Solicitation for Private Placements
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