SEC To Vote On Rules For General Solicitation In Some Private Offerings

It has been quite a while since the SEC proposed rules relaxing the prohibition of general solicitation in Rule 506 and Rule 144A offerings.  The criticism to the proposed rules flowed from issuer and investor advocate groups for a variety of reasons.  These rules are required by Section 201(a) of the JOBS Act.

According to WSJ MarketWatch, the SEC will vote on the proposal on July 10.

At this point, it may be worth going back through the proposal to be ready for the new rules.  Issuers will be anxious to begin advertising.  However, the proposal includes onerous requirements for verifying investor eligibility.  We look forward to seeing what changes, if any, the SEC plans to make to the proposed rules.

 

SEC Highlights Warnings About Unregistered Broker-Dealers in Private Oil And Gas Offerings

The SEC is taking notice of private oil and gas offerings and has increased its scrutiny of these deals. They have noted the recent increase in fraud cases for these deals at the federal and state levels. Thus, the SEC has released an Investor Alert for Private Oil and Gas Offerings. And the first thing they recommend to investors approached to invest?

“Is the person recommending the investment registered? Most people offering you securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority, or FINRA.”

The SEC cautions that being registered is not a seal of approval and that there may be conflicts of interest between the broker-dealer and the issuer.

In a general alert regarding the oil and gas industry, it is not surprising to find the SEC focused on the broker-dealer issue. Many advisors (including this writer) have been approached to sign off on an offering sales arrangement without a licensed broker-dealer with the explanation that:

  • “I do this all the time and it has never been a problem.”
  • “I am not acting as a broker-dealer, just a consultant who gets paid when the investment closes.”

Unfortunately for the would-be commission-eers, the SEC and state securities authorities do not share that analysis.

As the SEC said in the alert:

“If someone who is not registered solicits your investment, that person may be violating the law. One exception from broker registration is available to employees of the company offering the securities and who engage in strictly limited sales activities. If you aren’t consulting a registered broker or adviser, you should consider doing so. A registered broker or adviser that is familiar with the oil and gas industry and not connected to the offering can help you analyze the investment. Most importantly, working with a registered broker or investment adviser affords you certain legal protections.”

The SEC then illustrated benefits of using a licensed professional to assist in the investment decision:

Keep in mind that if the investment opportunity is an outright fraud, the written materials may look legitimate and every question you have about the opportunity may be answered to your satisfaction, but that doesn’t make any of it true. It is important to conduct your own independent research. One good way to do that may be to engage an investment professional specializing in oil and gas.”

It should be instructive to practitioners that in the course of a general industry investor alert, the SEC chose to highlight the risks of dealing with unlicensed broker-dealers. They are still clearly focused on this issue. Although some bad actors promote these deals, hoping to stay under the radar is a bad strategy for the promoter, issuer and investor.