Saturday, July 28, 2012

Sec Rules on private investment changes from the JOBS program still debated

A few months ago, we wrote the following article below. It was about the SEC rules regarding private investment.

Here is the article:

-----------------<Article begins>---------------

A few years ago, we went to a Chinese restaurant for a Chinese friend’s birthday party. The whole group ordered several dishes that we all shared. None of those dishes are what you would see on a typical American Chinese restaurant menu, nor were those available on this restaurant’s English menu. But they were delightful, spicy and you really felt like you were travelling abroad. We really enjoyed the experience and were happy to have been introduced to this menu. Strangely, this experience is also what most investors experience today. They do not know or are barely aware of the existence of other investment menus that could be available to them.
1929 is inscribed in everyone's memory as the year of the major stock market crash described as the starting point of the great depression. Congress enacted the Securities Act of 1933 and one year later created the Security and Exchange Commission (SEC) which still exists today. What is barely known by the public is how profound an impact this Act has on their investment options today. It explains why most people are invested in either stocks traded on the exchange, mutual funds, Certificates of Deposits or Treasury bonds (and other bonds) or a combination of these instruments without learning much about any alternatives.
Before this Act, anyone who had a business plan, an investment proposal or a business venture seeking funding partners could print flyers or advertise it in the newspaper in order to attract investors. Whether it was an investment in a new business venture or a real estate development or acquisition, all investors who heard about it could review the offering and jump on the venture if they so chose. After these laws, anyone advertising an investment offering without following those rules would face large penalties and could be prosecuted, regardless of whether the investment was sound or not. The dominant social view is that this protects the investor from fraudulent offerings, and we are sure it did and still does eliminate some fraud. However, there is more to the story as it also has had some negative impacts.
Current rules and regulations require a public offering to be subject to complex and expensive proceedings. Unless the investment is for a project that is in the tens of millions of dollars, the costs for making a public offering are prohibitive. As such, they have to seek funding through a private offering and even those laws are very strict as they require the entrepreneur seeking funding to have a prior relationship with a prospective investor in order to offer an ownership stake in the project. But that’s not all. Before the investments proposal is discussed, common practice under current regulation is to have the prospective investor sign a qualification form, and often actual investment proposals are not discussed until subsequent meetings.
To help understand this, let’s go back to the example of the Chinese restaurant. To eat a dish from the special menu, you would first need to establish a relationship with the Chinese restaurant owner. The owner would have first to make you sign a qualification form stating that you are able to eat spicy food and can handle it. Then, this will allow you access to this special menu. The restaurant owner however could not advertise publicly that he or she has a special spicy menu. You could only learn this after having established this relationship.
The Securities Act of 1933 defined a new term called “Accredited Investor” which, in short is a natural person who has individual net worth or join net worth with their spouse that exceeds $1 million or earns at least $200,000 per year or the joint couple income is at least $300,000 per year. This is what that qualification form is all about and it explains why accredited investors have access to more private offerings that ordinary investors. It doesn’t prevent ordinary investors from signing the qualification form but they will have to state they are “sophisticated investor” in order to potentially be allowed into some, but not all investments, although this definition is not clear and it involves more paperwork.
As for the general public, with the SEC on watch for any fraud, people have lowered their guard as they assume that all public offerings have been and are safe. However, this can be a false sense of security, just as the Bernie Madoff and Enron cases have demonstrated. By and large, private investment offerings are where the larger gains are made. The relationship between investors and entrepreneur is closer, the investment is usually more targeted and defined and follow up is done on a regular basis and over the phone. SEC or not, investors today just as before still have to do their homework and study enough about any investment to gauge the risk versus reward that is optimal for their overall portfolio. So the question that should be asked is if perhaps existing restrictions are too high and possibly inhibiting new projects and the economy in general. Interestingly on that front, in the interest of spurring economic development, the Obama administration is pushing to reduce the restrictions as part of the JOBS Act. These changes might come as soon as June of this year and allow companies and entrepreneurs to openly solicit accredited investors. We tend to agree, private funding will help create new opportunities, grow existing businesses and create new jobs. Let’s hope this passes. The SEC will still be there to watch for fraud.
Anyone in the investment business must be aware of all these regulations. They require that we all follow a very specific path to present investments & then to manage investor participation in them. We provide and manage investment opportunities for our existing partners who do not have the time and/or resources to find, analyze, acquire and manage real estate assets. These partners might otherwise have invested in stocks, bonds or mutual funds without ever been aware of this “menu” we are presenting them.
Open your eyes, ask your friends and scan your horizon, there are other types of investments possible; you just need the right contacts.
Phil Champagne, Managing Partner at
Chad Laird, Managing Partner at, a affiliate.

-------------< End of the article>----------------
The battle over this is not over yet as this recent article by Christine Williamson of states:

SEC to meet Aug. 22 to discuss private investment marketing rules

The SEC will hold a meeting Aug. 22 to discuss rules that will eliminate the ban on general marketing and advertising by managers of private investment funds as mandated by Title II of the JOBS Act, which was enacted April 5.
An SEC announcement Tuesday did not indicate when the commission will issue rules governing how managers of private securities offerings such as hedge, private equity, real estate and real assets funds may advertise their investment vehicles.
In congressional testimony on June 28, SEC Chairwoman Mary L. Schapiro said “the commission will be in a position to act on a staff proposal in the very near future.”

No comments:

Post a Comment