A proposed alteration to Rule 506 under Regulation D of the Securities Act of 1933 permitting issuers, including private investment funds (e.g., hedge funds), to advertise to a broad investor public was approved on July 10 by the Securities and Exchange Commission (SEC). Reg D outlines three exemptions to the Securities Act of 1933 where, under certain circumstances, some issuers may offer and sell their securities without having to register them with the SEC. The revisions to the Rule 506 exemption, lift the current advertising ban for issuers, as well as provide amendments which restrict issuers and individuals associated with the issuers, including promoters (referred to as “bad actors”) from relying on Rule 506 exemptions if they’ve had certain “disqualifying events”.
Consumer rights and investment advocacy groups, however, are up in arms about the changes. Barbara Roper with the Consumer Federation of America contends that the amended rule not only did not consider any recommendations by investment advocates, including recommendations made by an industry professional’s panel called the Investor Advisory Committee, but it also broadens the standards for advertising to “accredited investors,” which includes investors who “make more than $200,000 annually [as an individual] or have more than $1 million in assets beyond their home.” This can qualify those with enough retirement savings to be advertised to, a move that Roper argues does not protect the consumer from being sold private investments that may be scams or are simply not suitable or “appropriate” for the investor.
Simultaneous to issuing the final amendments to Rule 506, the SEC issued proposed amendments to Regulation D, which they say are “intended to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506.”
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