SEC Embraces the Power of Social Media Marketing

SEC Embraces the Power of Social Media Marketing

On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which intended to encourage investment funding by easing securities regulations. Yesterday, as directed by the JOBS ACT, the SEC voted to change a rule which banned advertising efforts and the publicizing of unregistered share offerings to the general public. This type of general solicitation has been strictly off-limits in the private investment world since the Securities Act of 1933. With the ban lifted, entrepreneurs can now harness the capabilities of social media tools, like Facebook and Twitter, to reach their target audiences, in an effort to raise capital and gain investors.

The amendment requires that solicitation efforts only be made with reasonable steps to verify that purchases of the securities are by accredited investors. ‘Accredited investors’ are defined in Rule 501 of Regulation D as follows:

1. A bank, insurance company, registered investment company, business development company, or small business investment company;
2. An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. A charitable organization, corporation, or partnership with assets exceeding $5 million;
4. A director, executive officer, or general partner of the company selling the securities;
5. A business in which all the equity owners are accredited investors;
6. A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
7. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
8. A trust with assets in excess of $5 million, not formed to acquire the securities offered whose purchases a sophisticated person makes.

Issuers should consider a number of factors when determining the reasonableness of the steps for verification, such as:

1. The nature of the purchaser and the type of accredited investor that the purchaser claims to be;
2. The amount and type of information that the issuer has about the purchaser; and
3. 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.

It is important to note the Commodity Futures Trading Commission (CFTC) has not adopted to lift the ban for fund advisors who are registered as commodity pool operators. Solicitation restrictions on those activities still remain.

The partners and staff at WithumSmith+Brown, PC can help facilitate the verification process. We can assist with an verification service on your behalf or provide a potential investor accreditation checklist for you to use. For questions on the JOBS Act and newly enacted rules, contact your WS+B partner, today.

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