Wave of Securities Fraud Possible Under Regulation D Rule 506(c), Warns Secretary of State Ross Miller

General solicitation of private offerings allows scammers to connect directly with investors

Post Date:09/23/2013

Contact: Catherine Lu, Public Information Officer 
             (702) 486-6982 / 334-7953 

(Carson City, NV; September 23, 2013) – Secretary of State Ross Miller warns investors that Regulation D Rule 506(c) of the Securities Act, which goes into effect today, could open the floodgate to a wave of securities fraud. Investors should fully educate themselves of the new rule that allows for the general solicitation of Regulation D offerings.

Congress passed the Jumpstart Our Business Startups (JOBS) Act in April 2012 which changed the way that Regulation D Rule 506 offerings can be sold. Private placement offerings of securities, such as stocks, bonds and other instruments, are exempt from SEC registration requirements, and the state of Nevada does not review them to make sure the risks or material information about the company is adequately disclosed.

Under Rule 506(c), companies are allowed to publicly solicit investors and advertise the sale of securities without registering the offering with either the SEC or any state, if certain requirements are met. These investments may be sold via television commercials, newspaper ads, internet sales and cold calls.

“This rule change provides a new solicitation platform that is another avenue for swindlers to scam investors, so I urge investors to perform due diligence and thoroughly check the offerings before investing,” said Miller.

Previously, Rule 506 offerings were only made known to investors through their investment professionals or word of mouth. Individuals may use Regulation D 506(c) exemptions to commit fraud, so investors should understand the following:

  • These offerings often involve companies with a limited history.
  • There may not have been a regulatory background check of the sellers, managers or officers of the company issuing the investment.
  • They often promise higher rates of return – and come with a higher risk. 
  • These securities are generally illiquid, which means you may have a limited ability to get out of the investment and may hold it indefinitely. 
  • You may be offered less information than a public offering. 
  • No regulator has confirmed that the risk disclosure or information about the company is adequate.

Regulation D Rule 506 investments, if sold via advertisements or general solicitation, may only be sold to accredited investors. An accredited investor is:

  • A natural person must have a net worth, exclusive of your primary residence, of more than $1 million, or 
  • Have had an income over $200,000 individually, or $ 300,000 with your spouse, in each of the last two years, and expect to earn the same amount this year.

For a complete summary of the proposed regulations that go into effect today, click here.

As an investor, you should know the following:

  • Don’t sign an agreement or document unless you understand it completely. Refuse to sign an agreement with blanks or areas that are not completed. 
  • Consider seeking the advice of a licensed investment professional. 
  • Ask questions, and request information. The law does not require that they provide you with the same information that is contained in a public offering, but be sure to ask questions about the company’s financials, history and the individuals running the company. Understand how the company will be able to pay you what is promised. 
  • If the person selling the investment cannot adequately explain it or doesn’t understand it, walk away. 
  • If you receive a cold call about an investment from someone you do not know, don’t be afraid to hang up. 
  • If you are asked to falsify your financials or told to “just claim you are accredited,” walk away. 
  • Don’t be pressured by false deadlines meant to hurry an investor. 
  • Don’t feel compelled to invest because they purchased lunch or dinner for you. 
  • Don’t be flattered if you are “invited” or they are making an exception and “letting you buy.” 
  • If it sounds too good to be true, it probably is.

If you have any concerns or questions, or you are asked to submit a form that establishes you as an accredited investor and you are not, please contact the Nevada Secretary of State Securities Division at (702) 486-2440.

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