November 10, 2017

Seat Belts, Securities Laws and Crap Tables

Since 1968, Federal and state governments have moved toward mandating that every car be equipped with seat belts and that every passenger wear a seat belt, or be subject to a traffic ticket and likely a fine. Opposition to these laws suggested that the cost of the seat belt installation was burdensome and that the requirement to wear the seat belts was a restraint of our personal freedom. Governments countered this opposition by saying that it was good public policy to impose these restraints on everyone who travel by car, as everyone needs to limit the risk they take when getting in an automobile. There is no discrimination here, everyone is covered, regardless of your driving experience.

In 1981, the laws established by the Securities and Exchange Commission (SEC) introduced the current standards for the concept of accredited and non-accredited investors. The theory was that certain investors, because they were rich or smart, did not need the protection of the government when they were making investment decisions. Statutes were written to define accredited investors as those who had a net worth in excess of $1 million or an annual income of $200,000, as a single tax payer or $300,000 as a married couple filing a joint return. Investors who did not meet those financial standards were defined as non-accredited and were deemed to need the protection of the Federal and state governments to limit the risk they take in investing. Today, some securities offerings have been limited to only allow accredited investors, with the government’s stated public policy purpose of protecting all other investors from the risks of investing. The government could be said to be discriminating against those who are not rich and smart by not letting them invest as they choose.

Today, when you step up to the crap tables…. you roll the dice…you win or lose. No one is discriminated against by any laws. What’s up with that?

Can I Advertise for Investors for my Private Placement on facebook?

This is a common question from people who have put together a group investment and are looking to attract investors for their offering. The answer is, that unless you are doing your private placement under Reg. D, Rule 506c you cannot general solicit or advertise your offering on social media, including facebook. Here is the rule:

Reg. D Rule 502:

(c) Limitation on manner of offering. Except as provided in § 230.504(b)(1) or § 230.506(c), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;  

All social media has been determined to fall under category (1) above.

Private placements are designed to be a grouping of investors and a sponsor who have a “pre-existing and substantive relationship.” Advertising and solicitation, by its implication, would allow the sponsor to accept investors not known to the sponsor and allow investors to invest with sponsors they do not know.

SEC staff has said that for a relationship between the sponsor and an investor to be pre-existing, it will have been established before the terms of the offering are developed and the offering commences. This appears to limit the sponsor’s ability to advertise or solicit potential investors when the sponsor has a current offering.

SEC staff has also said a “substantive relationship” may be established when a sponsor has “sufficient information to evaluate the prospective offeree’s sophistication and financial circumstances.” This also appears to limit the sponsor’s ability to learn about a potential investor attracted by advertising.

The exception to this rule in Reg. D is to conduct an offering under Rule 506(c) which allows advertising and general solicitation as long as the sponsor takes steps to be reasonably assured that every investor is accredited. Under the policy of identifying investors as being accredited ($1 million in net worth or $200,000 or $300,000 in annual income, depending on the taxpayer’s filing status) there is thought that those who are rich or smart can determine for themselves whether the risk associated with a particular investment fits their own risk tolerance. Through their own due diligence, they are capable of determining the quality of the investment and the sponsor, even when they are attracted to the investment through advertising and solicitation.

So, protect your private placement exemption by not advertising your offering on facebook.

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