NASAA: Private offerings a top investor threat

For the second consecutive year Rule 506 of Regulation D private offerings were “at the heart” of state securities enforcement actions, according to the North American Securities Administrators Association’s (NASAA) annual enforcement report.

Rule 506 of Regulation D is considered a “safe harbour” for private equity funds where they can raise unlimited amounts of money as long as it is from “accredited investors” – crudely, an organisation with more than $5 million or a person with more than $1 million.

The study states that 16 states reported a total of 47 enforcement actions involving hedge or private equity funds and the “inclusion of these products in this summary is no surprise, as the items referenced above have led the list of most common products at the centre of enforcement actions for years”.

Private offerings also remain on NASAA’s list of top investor threats and are joined by crowd funding and internet offers under the Jumpstart Our Business Startups Act (JOBS) – which aims to help small businesses raise capital through relaxing certain securities regulation.

These include relaxed rules for public solicitation for private funds and disclosure of information to investors over the internet under the Act, which have not yet been finalised.  

However the study states that when the relaxed rules and registration exemptions are effective, they will merely make investments in small businesses more prevalent and not less risky.  

The study also voiced concern that the JOBS Act provisions do not eliminate fraud which NASAA see as “an unfortunate common feature of internet securities activity”.

NASAA also expect the “switch” from federal regulator to state regulator under Dodd-Frank to increase the number of violations. 

Matt Kitzi, Missouri securities commissioner and chair of NASAA’s Enforcement Section, said in late August that as many midsize advisors “have not been examined in many years or ever” state regulators will continue to find more enforcement issues.