Authors

Ilon Oliveira, Golden Gate University School of Law

Article Title

Regulation of Rule 506 Private Placements: The Teetering Balance Between Investor Protection and Capital Formation

Abstract

This Comment aims to show that since the creation of Reg. D private placements, Congress and the SEC have promulgated a series of amendments and enactments that have collectively resulted in a heightened risk of fraud and inadequate safeguards for investors. Part I of this Comment will discuss private placements and the significant enactments and amendments that affect Rule 506 private placement offerings (“Rule 506 offerings”). The most notable amendments in this discussion will include the preemption of state blue-sky laws in 1996, the shortening of the holding period before resale in 2007, the exclusion of an investor’s primary residence in the calculation of net worth for accredited investor status in the 2010 Dodd-Frank Act, and, as part of the 2012 JOBS Act, the permission for general solicitation and advertising of private placement issues, and the increase in the shareholder threshold for forced registration.

Part II of this Comment will point out the laws affecting Rule 506 private placement offerings that collectively result in failures to protect investors from fraud. Specifically, it will address the lax reporting requirements currently in place, the outdated classification of investors permitted to invest in Rule 506 offerings,10 and the dangers presented with the permission of “general solicitation” in Rule 506 offerings. Part II will also address the dangers with the shortened resale period and increase in shareholder threshold for forced registration, and it will discuss the fraudulent practices that occur in the offering, resale, and subsequent trading of private placements in the secondary markets, primarily due to the inadequate regulations currently in place. Part III of this Comment will provide suggested amendments to the existing regulations in order to provide a clearer and more comprehensive guideline for Rule 506 offerings. Finally, the Conclusion of this Comment assembles the issues, arguments, and solutions set forth.

Recommended Citation

Ilon Oliveira, Regulation of Rule 506 Private Placements: The Teetering Balance Between Investor Protection and Capital Formation, 45 Golden Gate U. L. Rev. 287 (2015).
https://digitalcommons.law.ggu.edu/ggulrev/vol45/iss3/5