By: Roy Salisbury | Monday, January 16 2017
Many have been touting the new regulations for private placements under Regulation D 506 (c) as a game changer for small business. However, the Accredited Investor is allusive for most and many believe you just buy a list and off you go, this is good for the list company but not so much for the buyer.
“SEC Has ‘Open Investigations’ of Rule 506(c) Offerings”
Securities and Exchange Commission Chairwoman Mary Jo White says the agency is investigating whether some issuers of private placements properly vetted accredited investors.
In a recent Q& A discussion at the 43rd Annual Securities Regulation Institute, held in San Diego, White said that in relation to the SEC’s lifting of the ban on general solicitation under Rule 506(c) private offerings, “on the fraud/misconduct front,” the SEC has “some open investigations in several categories.”
One area, White said, is whether issuers have made reasonable efforts to determine whether who “they’re selling to are accredited investors.” Rule 506 allows private placement offerings to accredited investors without the SEC filing requirements of a public offering. Rule 506(c), enacted under the Jumpstart Our Business Startups (JOBS) Act, allows public advertising of certain offerings.
White said there are “some instances of fraud, but what we don’t see yet, and hope we don’t, is evidence of rampant fraud in that market, obviously, something we have to stay very vigilant about.”
White noted that while 506(c) is “being used, it’s not being used perhaps as much as some would have thought it might be.”
Rule 506(b), she added, “where there isn’t general solicitation” continues to be “a hugely vibrant market.” From 2013, when 506(c) became effective, through 2015, White continued, “you had about a $2.8 trillion sized market for 506(b) and about a $71 billion market for 506(c). So that gives you a sense of the difference in the use of those exemptions.”
This year, White added, “and again, not to over-conclude from this, the size of the 506(c) offerings are getting bigger by size. Not in numbers, but in size.”
Like so many efforts to help smaller businesses it benefits the larger businesses and has a weak trickledown effect on smaller businesses at best. The reason is not obvious to many but investors are interested in deals that are viable, mitigates risk and larger well defined transactions are a safer bet. Further most Accredited Individual Investors are risk adverse and in no way, pursue Venture Capital type deals the risks are just too great disqualifying many deals.
The market size “From 2013, when 506(c) became effective, through 2015, White continued, “you had about a $2.8 trillion sized market for 506(b) and about a $71 billion market for 506(c)” is no surprise the larger offerings deal almost exclusively with Institutions that are without question accredited and are part of an underwritten placement in which the licensed underwriter knows the investment community.
These underwriters have access and in most cases, will not even look at a transaction under $50 million and up leaving the average size deal out of the market. Because of access they can rely on a traditional Reg D as they have in the past.