When the Securities and Exchange Commission lifted the ban on general solicitation and general advertising for private offerings of securities, can marketing blitzes on Twitter and other social media sites be far behind?
It is not likely that we will see hedge funds aggressively touting investments on Twitter, or on bus shelters or milk cartons any time soon, because federal regulations will limit what issuers can say in these media. Even then, hedge funds and other issuers will want to proceed cautiously, because they must comply with specific rules designed to prevent fraud.
Lifting the ban on general solicitation. For decades, start-ups, hedge funds and other companies seeking capital could only solicit investors in private offerings. These issuers could only publicly offer their shares if they registered such shares with the SEC. Further, commingled funds could only publicly offer their shares by registering with the SEC under the Investment Company Act. In either case, registration involved significant capital, disclosure, reporting and operational restrictions that start-ups and hedge funds found prohibitive.
The Jumpstart Our Business Startups Act (JOBS Act), which Congress enacted in April 2012, ordered the SEC to relax the ban on general solicitation and general advertising in certain private offerings. Among other things, this law required the SEC to adopt rules to allow issuers to make a general solicitation of investors, and to advertise, without registering with the SEC.
On July 10, 2013, the SEC published regulations implementing the JOBS Act’s mandates to ease the ban on general solicitations. While this development is welcome news to start-ups and small hedge funds that want new investors but can’t afford the costs of registering with the SEC, the rules come with some important catches. Most notably, issuers relying on the new exemption can only sell shares to “accredited investors,” that is, investors that meet minimum annual income or net worth thresholds. They must also file with the SEC “Form D,” which contains specific information about the issue and the issuer. Click here to read our client alert, Goldilocks, Porridge and General Solicitations.
General Advertising. The SEC proposed rules that would require issuers to disclose prominently certain warnings in “any written communication that constitutes a general solicitation or general advertising” of any offering that relies on the new exemption from registering shares with the SEC. Social media entries and blogs fall squarely within this category, thus creating compliance challenges for issuers that want to find investors in social media. For example, all issuers must disclose in all written communications and advertising that:
- the securities may be sold to “accredited investors;”
- the securities are being offered in reliance on an exemption from the registration requirements of the federal securities laws and thus do not have to comply with those disclosure requirements;
- the SEC has neither passed upon the merits nor approved the offering;
- the securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
- the investment involves risk.
To be sure, it will be difficult to cram these disclosures into a 140 character tweet.
Private funds. Private funds, such as hedge funds and private equity funds, must also disclose that the offering is not subject to the protections of the Investment Company Act, which regulates investments in mutual funds, ETFs and other registered pooled investment vehicles. Further, private funds that want to mention performance would also be required to disclose, in any written communication, that, among other things:
- performance data represents past performance;
- past performance does not guarantee future results;
- current performance may be lower or higher than performance data presented;
- the private fund is not required by law to follow any standard methodology when calculating and representing performance data;
- the performance of the private fund may not be directly comparable to the performance of other funds; and
- investors can call a phone number or visit a website for more current performance data.
The SEC believes that private funds should be subject to the same rules for advertising and written communications that apply to mutual funds, whether or not the private funds rely on the exemption from registration.
The SEC is watching. The SEC will monitor general solicitations, general advertising and social media entries posted by issuers, including private funds. This area is fertile ground for SEC enforcement proceedings. Accordingly, you should proceed with cautiously when discussing private offerings, especially in social media, where cramming in all required disclaimers may be difficult.
Federal securities regulators have published guidance for issuers, investment advisers, broker-dealers and investment companies that use social media. You can listen to our presentation about use of social media by investment advisers, broker-dealers and investment companies by clicking here.