NASAA Issues Investor Advisory on Private Placement Offerings

Lifting the Advertising Ban Will Expose Investors to Greater Risk of Fraud

Download: Investor Advisory

WASHINGTON, D.C. (April 2, 2013) – In advance of a federal rule to allow advertising of high-risk and potentially fraudulent private placement offerings, the North American Securities Administrators Association (NASAA) today issued an advisory cautioning investors about the risks these offerings carry. NASAA’s private placement advisory is available here.

Private placement offerings allow companies to raise money by selling stocks, bonds and other instruments. These offerings may be exempt from federal securities registration requirements. As a result, this exemption allows a company to raise business capital without having to comply with the registration requirements of a public securities offering.

Currently, Rule 506 of Regulation D of the Securities Act of 1933 does not permit general solicitation or advertising of private placement offerings. The JOBS Act directed the Securities and Exchange Commission (SEC) to lift this ban as long as the sales are limited to “accredited” investors – people who have sufficient wealth or access to information that would presumably allow them to make completely informed investment decisions. The SEC is finalizing its proposed rule lifting the ban.

“State securities regulators are concerned that Main Street investors will be lured into high-risk or fraudulent investments when the ban on general solicitation of private placement offerings is lifted,” said NASAA President and Arkansas Securities Commissioner Heath Abshure.

Once implemented, this rule will allow companies and promoters to offer securities through direct mail, cold calls, free lunch seminars and television or radio commercials. “As a result, unscrupulous companies and promoters may take advantage of the new rules to offer potentially fraudulent investments,” NASAA’s advisory says.

Because private placement offerings made in reliance on Rule 506 of Regulation D 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.

“Rule 506 has been used by legitimate small businesses as an important source of capital, and state securities regulators want those businesses to be able to thrive and create jobs without unnecessary regulatory impediments,” Abshure said. ”However, a healthy private placement marketplace requires investors who feel adequately protected.”

For more information about the risks associated with private placement offerings, contact your state or provincial securities regulator. Contact information is available here.

For More Information:

Bob Webster | Director of Communications
202-737-0900

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