New Rule Regarding Solicitation of Investors

Yesterday the Nevada Secretary of State posted a media release regarding new regulations that went into effect regarding public solicitations for investors. The article warns that it could open the floodgate to a wave of securities fraud and that investors should educate themselves of the new rule- Regulation D Rule 506(c) of the Securities Act.

In April 2012 Congress passed the Jumpstart Our Business Startups (JOBS) Act, which changed the way that this rule allows offerings to be sold. According to the article private placement offerings of securities, such as stocks, bonds and other instruments are exempt from SEC registration requirements. Furthermore the state of Nevada does not review them for verification of information or level of risk.

Additionally it states that under this new rule companies are allowed to publicly solicit investors and advertise the sale of securities without registering the offering with either the SEC or any state if certain requirements are met. These investments may be sold via television commercials, newspaper ads, internet sales and cold calls.

“This rule change provides a new solicitation platform that is another avenue for swindlers to scam investors, so I urge investors to perform due diligence and thoroughly check the offerings before investing,” said Secretary Miller.

Previously such offerings were only made known through investment professionals or word of mouth. As a precaution to protect investors from fraud, they should fully understand the following:

• These offerings often involve companies with a limited history.
• There may not have been a regulatory background check of the sellers, managers or officers of the company issuing the investment.
• They often promise higher rates of return- and come with higher risk.
• These securities are generally illiquid, which means you may have a limited ability to get out of the investment and may hold it indefinitely.
• You may be offered less information than a public offering.
• No regulator has confirmed that the risk disclosure or information about the company is adequate.

Regulation D Rule 506 investments, if sold via advertisements or general solicitation, may only be sold to accredited investors. An accredited investor is:

• A natural person must have a net worth , exclusive of your primary residence, of more than $1 million, or
• Have had an income over $200,000 individually, or $300,000 with your spouse, in each of the last tow years, and expect to earn the same amount this year.

For a complete summary of the proposed regulations that went into effect 9/23/13 go to http://www.sec.gov/rules/proposed/2013/33-9416.pdf.

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