Wait a Bit Longer for Removing the Ban on General Solicitation and Advertising

On June 28 Securities and Exchange Commission Chairman Mary L. Schapiro testified that the SEC will not make the deadline for lifting the ban on general solicitation and advertising and the reasonable process for verification of accredited investors. Title II of the JOBS ACT gave the SEC 90 days to craft the regulation.

“As I stated to Congress prior to the passage of the Act, time limits imposed by the JOBS Act are not achievable. Here, the 90 day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input.”

Since there has not even been a proposed rule available for comment, there was no doubt the SEC was going to miss the deadline.

The regulation will likely be a key change for private fund managers.

I don’t expect private funds to engage in bulk email or late night television commercials. I would expect more advertising in trade publications and more engagement with the media.

For me the bigger concern is what the SEC is going say about the “reasonable steps to verify that purchaser of the securities are accredited investors…” that the SEC has been empowered in include in this new regulation. The SEC has been empowered to implement requirements for years. It has just chosen not do any thing. The JOBS Act has given the SEC a little nudge to act.

Perhaps the SEC will not act.

The current method of self-certification for accredited investors seems to work for now. Imposing some requirement to gather financial information would dramatically increase the amount of sensitive personal information being transmitted and stored. That will mean firms will need to beef up their data security and deal with this new source of personal information. Inevitably, there will be a breach and investors identity’s will be stolen.

The current process of self-certification of investors seems to work well. Of course, I could see how the failure to review a potential investor could lead to fraud. It would seem to hurt the investor, committing to an investment he or she could not afford. perhaps it would be a red flag to regulators that the adviser is not conducting the diligence to conclude that an investor is accredited, and is therefore preying on unsophisticated investors.

However, for private funds the minimum investment amount is usually equal to or in excess of the standard for being an accredited investor. If the fund requires a minimum investment of $1 million, then the investor presumably has the $1 million net worth required by the accredited investor standard. Hopefully, the rule will contemplate that situation and not overly burden private funds.



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