SEC Preventing Private Placements

Pj de Marigny, DITMo Strategie
Director, GARP, Southern California Chapter

The SEC is considering a new rule preventing private placements to felons or “bad actors.” They are presently accepting comments.

The rule is bad for two main reasons:
1 – Felons who in bad faith are raising money through exempted securities under 506 RegD are just as much in violation and exposure to securities fraud as if they didn’t offer the securities under the exemption. Violation of the exemption itself has less remedy than the underlying fraudulent offer.

Under a guise of proactively stopping felons from repeating violations, a great number of others may fall under the “bad actors” umbrella who may be honestly conducting themselves in activities to raise money for those startup or other ventures that are too small to employ larger merchant and investment banks. The rule for this reason will do very little to stop fraud but adversely impact entrepreneurial investment. It is the smaller brokerages that mainly fund these activities, and it is they who are quickly disappearing in a maze of over-regulation or could be vilified from a past indiscretion unjustly.

2 – Passing this new SEC Rule on “BAD ACTORS” and “Felons” precluding their involvement in private placements will also lull the public into a sense of safety that somehow the deals are stamped with SEC approval having ferreted out the scoundrels.

The SEC would be better to ensure that 506 RegD exemptions properly disclose the ACTIVITY that cause “Bad Actor” classification in the memorandum itself. This is tantamount to what is presently done under Broker Check and U4 disclosures. *.*