Regulations on per-share estimated values and general solicitation from qualified investors are bringing about a variety of changes for private placements, a panel of legal experts said at the Investment Program Association’s 2016 Executive Leadership Summit, held in Washington, D.C., on April 19.
More custodians and broker-dealers will be expecting to see per-share values that are compliant with Regulatory Notice 15-02 from the Financial Industry Regulatory Authority, said Martin Dozier, counsel at Alston & Bird. The amendments concern how per-share estimated values are disclosed in account statements for direct participation program and nonlisted real estate investment trust securities, with the goal of giving investors more accurate and timely estimations of value.
Values under 15-02, however, might not be uniform, as “one issue with wording is that an issuer can come up with different values if it chooses to,” Dozier said.
Private placements have seen many “avenues” open up in the time since general solicitation to raise money from qualified investors became permitted under Rule 506(c) of the Securities and Exchange Commission’s Regulation D, said panel moderator Ryan Kretschmer, legal counsel with Walton International Group. The change was made under the Jumpstart Our Business Startups, or JOBS, Act.
Despite much talk of crowdfunding already taking place, the JOBS Act’s crowdfunding regulations are set for a May 16 implementation, meaning that “pure crowdfunding” is not yet in effect, said Peter Reinert, partner at Lowndes, Drosdick, Doster, Kantor & Reed.
“Pure crowdfunding” is meant to allow startups to have easier access to capital, which is capped at $1 million over a rolling 12-month period, and they can sell to accredited and unaccredited investors, although the latter are restricted in their investing, Reinert said.
That $1 million cap could mean that “pure crowdfunding” might not be a “true alternative” for the private-placements space, Kretschmer said. It likely means 506(c) offerings will be an expansion, not a replacement, of 506(b) offerings already in effect, he said.
Darryl Steinhause, partner at DLA Piper US, said that broker-dealers are often reluctant to participate in 506(c) offerings, with some saying that they are concerned that they will lack control over their representatives’ advertising.
Reinert also said that a key difference under 506(c) as compared with 506(b) offerings is that a pre-existing business relationship is not required to advertise under 506(c).
At least 25 states have passed crowdfunding legislation, although how much effect those laws will have remains questionable, he said.