New Calls to Eliminate the Prohibition of General Solicitation or General Advertising in Private Securities Offerings
Within the last two weeks, there have been two new calls for the Securities and Exchange Commission to amend its Rule 502(c) of Regulation D to eliminate the prohibition of “general solicitation or general advertising” (the “Prohibition”) with respect to certain exempt, private securities offerings.
On January 6, 2012, the Advisory Committee on Small and Emerging Companies, organized by the SEC, submitted to the SEC its “Recommendation Regarding Relaxing or Modifying Restrictions on General Solicitation in Certain Private Offerings of Securities,” in which it recommended that the SEC “relax or modify” the Prohibition for offerings under Rule 506 of Regulation D in which securities are sold only to accredited investors. On January 9, 2012, the Managed Funds Association, a leading trade group for the private-investment-funds industry, submitted to the SEC a public rulemaking petition requesting elimination of the Prohibition with respect to offerings of securities of private funds. These calls are in addition to recent federal legislative activities favoring enhanced access to capital for entities, such as the passage (in November 2011) of H.R.2940 by the U.S. House of Representatives, which would require the SEC to eliminate the Prohibition in offerings in which all purchasers are accredited investors.
The Advisory Committee’s recommendation was apparently based on its view that the Prohibition (1) impedes the ability of “many privately held small businesses and smaller public companies” to raise capital through private securities offerings and (2) is unnecessary in offerings sold only to accredited investors.
The MFA’s request was based on a number of arguments, including that eliminating the Prohibition would, among other things:
- Facilitate capital formation by increasing information available to those sophisticated investors qualified to invest in private funds (i.e., at a minimum, accredited investors).
- Increase the transparency of private funds by making more information available to regulators regarding the private funds.
- Make the exempt offering of securities of private funds more efficient by reducing the legal uncertainties involved in interpreting and applying the Prohibition.
- Permit private funds to take advantage of current communications technology in the ways in which offerings are conducted and disclosure is made.
In its request, the MFA acknowledged that the Prohibition is or may be appropriate for securities offerings intended for unsophisticated or “retail” investors, but noted that offerings of securities of private funds are, or should be, intended only for sophisticated investors. The MFA also stressed that the offering-related activities of private fund managers would continue to be subject to the anti-fraud provisions of the federal securities laws, including the anti-fraud provisions of the Investment Advisers Act of 1940 that apply to those managers as investment advisers (whether registered or exempt).
OUR TAKE: The SEC has consistently recognized the concept of varying requirements of or restrictions on securities offerings depending on the type of investor to which an offering is made. Many securities practitioners have long advocated elimination of the Prohibition, at least in exempt or private offerings to the type of investor that is sophisticated or qualified or that “can fend for itself.” They argue that the Prohibition is too broad and unnecessary as an investor-protection mechanism and that offering requirements or restrictions should focus on the investors that actually purchase securities in the offering, and not on prospective investors that do not purchase. Perhaps the current pressure to facilitate access to capital will prompt the SEC to reconsider these (and similar) arguments and amend Rule 502(c) to eliminate the Prohibition, at least for certain exempt offerings.