NASAA Issues Investor Advisory on Private Placement Offerings (with Parness Comment)

In advance of the adoption of SEC Rules implementing the JOBS ACT to allow advertising of private placement offerings, the North American Securities Administrators Association ("NASAA") issued an advisory cautioning investors about the risks these offerings may carry.

According to the advisory, because private placement offerings made in reliance on Rule 506 are not reviewed by regulators, they have become a "haven for fraud." According to NASAA's most recent enforcement statistics, private placement offerings are the most frequent source of enforcement cases conducted by state securities regulators. The NASAA advisory includes information on the risks associated with private placement offerings and tips on how to protect yourself when considering such an offering.

Parness Comment: The NASAA Advisory is reasonably accurate with regard to the nature of private placements and their risks (particularly those which may arise once general solicitation and advertising is permitted), and provides helpful recommendations to investors as to how to protect themselves before committing to purchase securities offered in private placements. There's no doubt that there have been, and will continue to be, fraudulent private placements (as there are, and will always be, fraudulent public offerings, despite prior reviews of prospectuses by the SEC and state regulators!). However, it is believed that NASAA and its members have exaggerated the scope of problems which have arisen with regard to private offerings by characterizing many, if not all, purported private offerings which haven't been registered under applicable Blue Sky laws as "Rule 506 offerings," despite the fact that an offering may not have been a bona fide Rule 506 offering to begin with, or the seller may not have actually claimed that it was relying on Rule 506 (or may have done so only as an afterthought in response to a state inquiry). Further, reviews of certain state securities administrators' websites have disclosed few administrative or court actions against issuers who actually filed "Form Ds" with the SEC claiming reliance on Rule 506, while a number of reported state actions reflect sanctions against actual Rule 506 issuers solely for failing to make timely notice filings with the state, not for fraudulent practices. When these reported state actions are measured against the tens of thousands of Form Ds filed with the SEC for Rule 506 offerings, it seems that the problems with these offerings are minimal, and it's unfair for the states to try to paint all of them as prospective frauds. Putting the Advisory in historic perspective, NASAA's war on Rule 506 offerings dates back to 1996, when Congress enacted the National Securities Markets Improvement Act, which preempted the states from registering or otherwise substantively regulating these offerings, but did allow the states to require limited "notice filings" (with filing fees) for, and preserved states' antifraud authority over, such offerings. This legislation replaced what was a disparate and confusing set of state private placement exemptions which made these offerings expensive and time-consuming and, thus, a major impediment to the capital-raising process. Nonetheless, it triggered a firestorm among the states, which generally react negatively to any federal preemption, no matter how well-intentioned, and the states' opposition continues to this day. It is noted that the SEC has proposed, but has not yet adopted, rules required by the Dodd-Frank Act which would add a "bad actor" disqualification condition to Rule 506, which rules would prohibit some potentially fraudulent offerings (or at least those conducted by persons who bothered complying with the Rule in the first instance). The bottom line for investors, as is the case for any securities offering, whether or not registered with the SEC and/or the states, is caveat emptor, and the general rule is that if a deal sounds too good to be true, it probably is.

Click hereto view Investor Advisory (links externally to NASAA website).For a compilation of recent news items with respect to the JOBS Act, see "Current Topics - JOBS Act."