Classically, under Section 4(2) of the U.S. Securities Act of 1933, securities offered and sold by an issuer in a manner not involving any public offering have been exempt from federal securities registration. The SEC in Regulation D has long spelled out a number of "safe harbors" that would guarantee an issuer who complied with the requirements thereof an exemption under Section 4(2). However, consonant with the wording of Section 4(2) these Regulation D safe harbors, with the extremely limited exception of Rule 504 offerings of $1 Million or less that were state law registered or which state law permitted to be sold to only accredited investors via public means, all probibited the use of general solicatations and offerings to the public at large.
Probably the most used Reglation D safe harbor was Rule 506 which allowed the offering and sale of a security in an unlimited amount to up to 35 non-accredited investors and to an unlimited number of accredited investors - although for reasons of other securities laws the ceiling on investors was often 99 or at most 499. Again, consonant with Section 4(2) public means could not be used to conduct the offering.
However, under the recently passed, and soon to be signed, JOBS Act the prohibition on general advertising and general solicitation is gone for Rule 506 offerings. As long as a Rule 506 offering is sold only to “accredited investors” (within the meaning of Regulation D), general advertising will be permitted for all issuers (including hedge funds, private equity funds and special purpose entities), after a 90-day period during which the SEC is to issue implementing rules. Apparently, although it is not 100% clear in the absence of the SEC Rulemaking, the offer itself can be pitched to persons who are not in fact "accredited" investors - such persons merely cannot be sold the securities being offered.
This harkens up visions of at least late night TV ads offering insomniacs all sorts of investment opportunities in unregistered securities. Of course, the Internet will be another logical place for promoters to hawk their securities wares to the public at large. Will more money be lost to "get rich quick" scamsters than will be gained in jobs created by what is, in effect, a new way to do an IPO? Hard to say.
Apart from the outcry, perhaps justifed, that consumer protection types are likely to raise, this is a rather odd, if not unprecedented, way that Congress has done things. One would have logically (if not politically) expected an amendment to Section 4(2) itself that excepted out the no public offering language under certain circumstances equivalent to those in the mandate to the SEC to change Rule 506.Technically, it would seem that the mandated rule change to Section 4(2) is at least arguably at odds with Section 4(2) and surely has eviscerated it to being quite close to a dead letter. However, given that Congress could clearly have changed Section 4(2) itself, and the somewhat tiny crack opened by old Rule 504 regarding the very limited use of public means to make an offering under Rule 504 of Regulation D, this might be of no legal import.
What will be most interesting and will flesh this legal curiosity out a bit more, will be to see what the SEC does by way of rule making for the "new" Rule 506 under the JOBS Act. In the meantime, to those offerors who seek to utilize this new bit of legal legerdemain, the key will be to await the SEC rule making. Gun jumpers beware.
Unlike in the 1913 poem "Sacred Emily" by Gertrude Stein, in law, a rose is often not a rose is a rose is a rose.