Readers of this blog are familiar with the recent regulatory changes that have created new possibilities for non-registered capital raises in the U.S.: general solicitations in Regulation D offerings, Regulation A+, crowdfunding, and to a lesser extent, new Section 4(a)(7) under the 1933 Act.
Many applaud the additional flexibility provided by these changes. At the same time, U.S. regulators are interested in determining whether these offerings will be properly offered and sold.
FINRA’s letter states:
“FINRA’s focus on private placements in 2016 will address concerns with respect to suitability, disclosure and due diligence. [footnote omitted] These concerns are relevant regardless of the underlying industry of the issuer or the type of investment (e.g., notes offerings, preinitial public offering investment funds, real estate programs, EB-5 investment funds or start-up companies). FINRA’s focus will reflect recent regulatory developments, including the ability to conduct general solicitations under SEC Rule 506(c) of Regulation D and the crowdfunding rules which will become effective in 2016. FINRA notes that some communications used by firms concerning private placements have not reflected the significant risks of loss of principal and lack of liquidity associated with these investments. Where a communication addresses a specific investment benefit associated with a private placement offering, a firm must ensure that the key risks associated with such benefit are disclosed. FINRA will continue to evaluate firms’ compliance with respect to their communications, including general solicitation advertisements and materials posted on the Internet.”
The OCIE letter notes:
“We will review private placements, including offerings involving Regulation D of the Securities Act of 1933 or the Immigrant Investor Program (“EB-5 Program”) [footnote omitted] to evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.”
In a nutshell, in addition to conforming their documents and procedures to the “black letter law” of the new rules, broker-dealers will want to ensure that their practices are appropriate from a suitability perspective, as well as for purposes of FINRA’s communication rules.