SEC lifts ban on advertising for certain private securities

Issuers of certain private securities, including hedge funds, will be able to advertise to the general public under a rule the SEC adopted Wednesday.

But only “accredited investors” will be permitted to invest in these private securities offerings as a result of rules adopted by the SEC on Wednesday. Accredited investors have:

• An individual net worth or a joint net worth with their spouse of $1 million or more, excluding the value and any related indebtedness of their primary residence; or
• Individual annual income of more than $200,000 or a joint income with their spouse of more than $300,000 in each of the last two years, with expectation of the same income level in the current year.

Certain “bad actors”—including convicted felons and those who have received certain disciplinary sanctions from federal securities and banking regulators—will be disqualified from participating in these securities offerings under a rule the SEC adopted that was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The previous ban on advertising by hedge funds, private equity firms, and certain other private investments was lifted as a result of rules implemented under the Jumpstart Our Business Startups (JOBS) Act of 2012. The provision was intended to make it easier for companies to raise capital, but there was concern that lifting the ban would pave the way for more fraud, SEC Chairman Mary Jo White said in a statement and at Wednesday’s open meeting.

White said the commission needed to act promptly on the JOBS Act requirement, but will pursue additional investor safeguards, if necessary. A proposal the SEC made Wednesday would require issuers to provide more information about these securities offerings to help the SEC monitor the market in an effort to provide new safeguards as new market practices develop.

“I believe the commission should closely monitor and collect data on this new market … and assess whether and to what extent the changes in the private offering market has led to additional fraud,” White said.

The rule amendments take effect 60 days after publication in the Federal Register. The rule proposal will be available for public comment for 60 days after it is published in the Federal Register.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.