SEC Makes It Easier to Advertise for Investors in Entrepreneurial Companies

On July 10, the Securities and Exchange Commission issued final rules under the JOBS Act to allow both entrepreneurial companies and hedge funds to use general solicitations, such as advertising or blogs, to attract accredited investors (those with a net worth of at least $1 million, excluding their primary residence, or annual income of more than $200,000 in each of the previous two years). Under the rules, companies must use reasonable methods to verify that any investors are accredited. The rules include a non-exclusive list of these steps, but in general, they the issuer to make an objective determination for each transaction whether the purchaser is an accredited investor. Those steps must consider facts and circumstances, such as:

• "the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
• the amount and type of information that the issuer has about the purchaser; and
• the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount."

The new rule was greeted by predictable enthusiasm from potential issuers and equally predictable concern from state regulators and investor watchdog groups concerned about fraud and excessive investment risk. In at least one instance so far, for instance, a supposed beef jerky startup attracted pledges for over $120,000 in investment, despite the fact that the company did not exist.

Articles on the rules can be found in the Wall Street Journal and the New York Times.