Section 201 of the Jumpstart Our Business Startups Act, or JOBS Act (expected to be signed into law soon by President Obama), requires the SEC to change the rules of a Rule 506 private placement to allow for general solicitation or general advertising so long as all purchasers are accredited investors.
Currently, Rule 502(c) prohibits an issuer in a private placement, or any person on its behalf, from offering or selling securities by any form of general advertising, including any ad, article, or notice published in any newspaper or magazine, on TV, or over the radio.
Depending on how the Commission revises its rules (they have 90 days from enactment), this change could significantly expand the way companies seek investors for private offerings. Imagine cold calls, Internet pop-ups, billboards, and hedge fund ads on TV. Of course the issuer will have to take reasonable steps to verify that purchasers are accredited investors, which is something responsible issuers do anyway.
Proponents argue lifting the ban on advertising promotes transparency, while critics (including key members of the Commission) argue the ban is an important protection against general solicitations reaching unsophisticated investors who may be duped by unscrupulous offers.
The JOBS Act further provides that any person who maintains a platform or mechanism for such advertisements does not have to register as a broker-dealer as long as they receive no compensation in connection with the purchase or sale of a security and do not have possession of customer funds or securities, among other requirements.
