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.