The Securities and Exchange Commission (SEC) has postponed issuing rules which would allow issuers of private securities to immediately begin to solicit the general public.  Instead the SEC will issue a proposed rule and solicit comment from the public.

While this rule change is mandated under the JOBS (Jumpstart Our Business Startups) Act, I am not sure this is in the best interest of Joe Public.  There are reasons certain rules exist.  Allowing private issuers to solicit the general public while not having checks and balances in place is a recipe for more scandals.

Again, I look to my family, this time my mother, with her $5,000 to invest.  And, I envision someone asking her to invest in a start-up company selling the best widget in the world.   Not having all the details about the investment and my mother wanting to make some quick money, a shrewd investment adviser might be able to take that $5,000 from her.  Under the current rules, this can’t happen because my mom is not an accredited investor.  If she was, maybe I wouldn’t have had to work all these years. 

The following are some of the rules:

  • Currently, companies can use Rule 506 exemption to raise an unlimited amount of money.  But it must stay within the Section 4(2) exemption by satisfying the following standards:
  • The company cannot use general solicitation or advertising to market the securities;
  • The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
  • Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
  • The company must be available to answer questions by prospective purchasers;
  • Financial statement requirements are the same as for Rule 505; and
  • Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.

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