Compliance & Regulation
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Obtaining written confirmation from a registered
broker/dealer, RIA, attorney, or CPA, which in turn
must evidence compliance with one of the two
principles-based verification methods above; or
–
If a natural person invested in a Rule 506 offering
as an accredited investor prior to the effective date
of the Rule 506(c) offering and remains an investor
of the issuer, the issuer may obtain certification
from the investor that he or she is still accredited.
Thus, I expect most of the private offering issuers that
Commonwealth works with will decide to continue to
issue securities pursuant to the existing parameters of Rule
506(b) rather than under new Rule 506(c).
What Does This Mean for Advisors?
Although these restrictive standards reduce my anxiety
over lifting the ban on general solicitations, I do think
advisors could face difficult situations, and here is why.
Issuers of Rule 506(c) securities will be allowed to advertise
via websites, social media, television, e-mail, cold calls,
mass mailings, newspapers, magazines, and the like. When
this realization sunk in, all I could think of is how the
pharmaceutical company ads on TV and in magazines
must lead to a veritable cornucopia of questions for doctors
about the advertised drugs. Likewise, I expect that when a
client’s interest is piqued by an ad for a private placement
security, he or she will inevitably bring it to the advisor
for advice or a recommendation.
Unfortunately, in accordance with NASD Conduct Rule
3040 (private securities transactions) and FINRA Rule
2111 (suitability), as well as firm policy, if a security is
not offered or approved by Commonwealth, an advisor
may not provide a recommendation, opinion, or call to
action or otherwise provide advice to a client about whether
or not he or she should buy, sell, or hold the security. Advisors
may, however, provide factual or resource information to
clients, which the clients may use to help make their own
decisions about a security, provided that such information
is delivered in its original form and in its entirety, properly
sourced, and not summarized or marked up in any way.
Let’s examine both of these rules in more detail and lay
out what you may and may not do.
Rule 3040: Private Securities Transactions
of an Associated Person
This rule states that no person associated with a member
firm shall “participate” in any manner in a private securities
transaction prior to providing written notice to the member
firm with which he or she is associated. The written notice
must describe in detail the proposed transaction and the
person’s proposed role therein and state whether he or she
has received or may receive “selling compensation” in
connection with the transaction.
What does “participate” mean?
As discussed in NASD
Notice to Members 01-79, participation in a securities
transaction includes the act of making the sale. It also
includes “referring customers, introducing customers to
the issuer, arranging and/or participating in meetings
between customers and the issuer, or receiving a referral
or finder’s fee from the issuer.”
What makes it a private securities transaction?
To answer
this question, it is helpful first to clarify the legal definition
of a security. In
SEC v. W. J. Howey Co.
, a landmark
Supreme Court decision handed down in 1946, a security
(i.e., an “investment contract”) is defined as:
1.
An investment of money
2.
In a common enterprise
3.
With profits derived from the efforts of others
A private securities transaction, therefore, involves
an advisor’s participation in a security transaction
that was not approved in advance and in writing by
Commonwealth, was not recorded on the books and
records of Commonwealth, and was not supervised by
Commonwealth as if the transaction had been executed
through Commonwealth. An advisor’s participation
in such a transaction without prior written approval
The ban on the prohibition of general
solicitation and advertising means that
you may start to receive more questions
from clients on Reg D offerings.
