In addition to ending the ban on general solicitation,
Section 201 of the JOBS Act directs the SEC to adopt regulations requiring the
issuer to take reasonable steps to verify that purchasers of securities are
accredited investors. This means, explained Senator Levin, that Congress
intended for the SEC to establish meaningful protections to ensure that
advertisements and marketing efforts resulted in the sale of these risky
securities only to accredited investors.
Instead of documenting the steps the issuer must take to
ensure that the investor is accredited, he noted, the SEC proposal would allow
investors to self-certify that they satisfy the criteria for accredited
investor. This approach is inadequate because experience indicates that
investors may misidentify themselves as meeting the criteria. The SEC does not
have the resources to monitor the tens of thousands of instances of general
solicitations to identify pools of misidentified investors or even to spot
troubling trends involving issuers that rely on self-certifications despite
indications that investors are neither sophisticated nor financially secure
enough to take on higher risk investments.
Section 201 does not detail the reasonable steps issuers must
take to verify that investors are accredited, instead requiring the SEC to take
on that job. But the SEC proposal ignores the statutory mandate, said Senator
Levin, declining to specify any verification procedures, a failure so blatant
that the Senator said that it ``borders on arbitrary and capricious.’’ He called
on the SEC to provide investors and issuers with clarity on the steps needed to
be taken.
In his view, the proposal also creates, with no statutory
basis, an alternative to the statute’s reasonable steps requirement by stating
that issuers may engage in a general solicitation if they reasonably believe
that the investors to be addressed will be accredited. This provision should be
removed because the reasonable belief alternative is contrary to the statute’s
plain language and needlessly complicates the accredited investor analysis.
The Senator also asked the SEC to consider setting up a
regulatory framework distinguishing between issuers engaged in operational
business and those that are private investment vehicles. Congress did not contemplate
removing the general solicitation ban without retaining any limitations on
forms of general solicitation for private investment vehicles, he maintained.
Not once in the lengthy congressional debate of the JOBS Act legislation did
anyone argue that the objective was to ease the capital aggregation process for
private investment vehicles, noted the Senator, adding that not once were the
words hedge fund, private fund or investment vehicle used either during the
committee mark-up of the bill or in the floor debate. Instead, the focus was on
small business capital-raising.
Thus, the Senator urged the SEC to exercise its authority to
regulate general solicitation in private offerings seeking to rely on a
registration exemption by requiring additional safeguards, disclosures and
auditor attestations to guard against fraud and unfair practices. The SEC has
already determined that the manner and substance of solicitation and
advertising for investments in registered investment companies merits
significant oversight. In the Senator’s view, since many of those same concerns
apply to investments in private investment vehicles, the SEC should impose
analogous protections for investments in private funds.