“With two bad rules adopted on Wednesday, the Securities and Exchange Commission has all but invited hucksters, rip-off artists and other bad actors to prey on individual investors. The new rules are another disturbing sign that under the leadership of the new chairwoman, Mary Jo White, the S.E.C. will pursue deregulation at the expense of investor protection.
“One rule concerns “general solicitation,” or the mass advertising of investments in companies that are not publicly traded. Until last year, federal securities laws had long banned general solicitation — and for good reason. Private securities offerings — say, by hedge funds, venture capital firms and start-ups — are not subject to disclosure rules and other investor protections that apply to publicly held companies; as a result, they are difficult if not impossible to evaluate without inside knowledge and are especially prone to fraud.
“Last year, however, in the scramble for campaign donations, Congress and the Obama administration joined forces to enact a law to lift the ban on general solicitation. The new law’s only nod to investor protection was a requirement that buyers of private offerings be “accredited,” an outmoded label that assumes that anyone with at least $1 million in net worth (not counting a home) or at least $200,000 in yearly income is an investing expert.
“The law left it up to the S.E.C. to establish reasonable steps that issuers of private offerings must take to verify that potential investors are accredited. But, in the rules adopted Wednesday, the S.E.C. did not impose any specific steps, nor did it bar issuers from allowing investors to self-certify that they are accredited. Instead, the agency produced a list of ways that issuers can check an investor’s accredited status, without requiring any hard-and-fast tests. Honest issuers will stick to the list, while bad actors will have wiggle room not to.”
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