» SEC Changes Rule 506c to Allow Advertising
In a 4-1 vote the SEC implemented a portion of the JOBS Act by enabling companies to advertise their Reg D Rule 506 private offerings. This opens up the door for private companies, brokers, and hedge fund managers to advertise to the general public. This event has many companies excited as it creates an opportunity to reach a larger number of investors. The caveat is that the investors still need to be Accredited Investors. General advertisements will expose everyone to investment opportunities that they may not be qualified to participate in.
Financial advisors can expect to receive calls from curious clients, interested in learning more about the advertisements they see. Many of the larger firms will not allow for advisors to advocate for investments in these private offerings, requiring them to be vetted first. This creates opportunity for independent advisors, specializing in business valuations and early stage companies, to capture market share from eager investors. Advisors, both independent and at large firms, will have to evaluate each opportunity to determine whether or not their client is qualified to participate. This may create challenges as non-accredited investors are unable to participate in private offerings they encounter.
Regulators fear that non-accredited investors will see these advertisements, contact the company directly, and participate in fraudulent offerings. With any legitimate investment opportunity there will be fraudsters that come along looking to replicate it. There is no real way to stop fraud other than educating consumers. Companies offering legitimate investment opportunities may want to go above and beyond to provide educational material, advertise through SEC recommended channels, and make their disclosures transparent. Companies will also want to verify whether each investor is accredited in order to maintain its “safe harbor” status under Rule 506. It is often easier to avoid advertising to the general public and target accredited investors specifically.
A better way to advertise to Accredited Investors is to buy a lead list and reach them directly over the phone or via mail. Companies and hedge funds, with private offerings, will do best by allocating their marketing dollars to reach investors that are qualified to participate in their offerings. According to 2009 data from the IRS only 3% of Americans made over $200,000 per year, the income level required to be considered “accredited”. With so few people reaching this income level, general advertisements will likely be wasted marketing dollars. This creates a new challenge for companies and hedge funds looking to capitalize on the lifting of the advertising ban.
Each company will need to do significant research to determine the best way to reach accredited investors outside of their personal network. A benefit of the SEC ban on advertising being lifted is the ability to send a private placement memorandum to more people in your professional network. While these people may not be accredited they could review and recommend investors that are. People like CPA’s, lawyers, and bookkeepers may have clients looking to invest and be able to point you in the right direction. In the meantime companies should carefully consider their advertising options to ensure that they reach the right audience, rather than marketing to a general public that still can’t participate.