Business Compliance Partners Discusses Bill that Lifts General Solicitation and Advertising Prohibitions

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The President voiced support for and is expected to sign the Jumpstart Our Business Startups (JOBS) Act that would lift the ban on general solicitation and advertising of private securities transactions (provided that all purchasers of the securities are accredited investors).

The Securities and Exchange Commission (SEC) will have to enact regulations within 90 days after the JOBS legislation is signed.

Currently certain securities may be offered privately to accredited investors in reliance on Regulation D and similar state rules, if the investment is marketed only to people with whom a company or intermediary has a preexisting relationship. The accredited investors are presumed to be familiar with the company in which they are investing and have the financial wherewithal to gauge and bear the risks of the investment.

The JOBS legislation also proposes to exempt certain persons from registration as broker-dealers. The exemption would be extended to persons providing platforms for offerings, those soliciting or purchasing the securities being offered and other supplementary service providers. However, the following criteria would have to be met. The persons couldn’t receive compensation in connection with the purchase or sale of the securities; couldn’t have possession of offering related funds or securities, and are not subject to or do not have any associated persons that are subject to statutory disqualifications from securities related and other associated activities.

The North American Securities Administrators Association (NASAA) issued a statement titled, “The JOBS Act an Investor Protection Disaster Waiting to Happen--Legislation Remains Fundamentally Flawed Product of Rush to Legislate”. The statement said that “Congress and the White House have sacrificed investor protection for politics and are in danger of repeating a legislative mistake that has allowed promoters of fraudulent securities offerings to steal millions of dollars from investors since 1996.” This is a reference to the passage of the National Securities Markets Improvement Act (NSMIA), which introduced Regulation D, which specifically preempts state authority to review certain private offerings.

In reference to the JOBS Act, Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities said, “It ignores the united and urgent pleas of leading national consumer and investor advocates not to roll back critical investor protections. In 2004, the Bush Administration preempted numerous state consumer financial protection laws in order to facilitate greater ‘financial innovation,’ especially in mortgage lending. Most of us remember how that experiment ended, but it seems that Congress has already forgotten.”

Despite the rhetoric, NASAA is hoping to help shape the regulations the SEC will draft by offering their Model Accredited Investor Exemption (MAIE) guidelines as a template.

NASAA routinely issues model guidelines, which can serve as a blueprint on which states can base their regulations. The MAIE provisions allow issuers to use general advertisements to “test the waters” for proposed offerings to attract accredited investors beyond those with previous relationships to the issuer or intermediary.

Although non-accredited investors could learn of offerings through general announcements, under MAIE issuers could still claim the private offering exemption because the securities offerings would be restricted to accredited investors.

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