Biggest Change for IPOs Still to Come

NEW YORK (TheStreet -- Most years, the Fourth of July is simply a patriotic celebration. In 2013, however, it's a deadline.

Why? Because this year it's the last day that, according to the Jumpstart Our Business Startups Act (aka the JOBS Act), the Securities and Exchange Commission has to deliver new rules dealing with advertising for initial public offerings.

The changes, which are part of Rule 506 of Regulation D, are about to blow the lid off of offering advertisements. If you thought crowd funding would be the biggest change out of the JOBS Act, think again. It's Rule 506. The whole thing is hugely complicated and the SEC was given only 90 days to get it done.

"Staff are working hard to meet the Act's timetable," said John Nester, SEC spokesman. Good luck with that.

Companies using the Rule 506 exemption don't have to register their securities and don't have to file reports with the SEC. They file a Form D with minimal information. That's the appeal for many companies. They can sell to an unlimited number of "accredited investors" but until now, they couldn't advertise the securities. Also, the securities are restricted and can't be sold for a year.

Congress has decided to lift the prohibition on advertising, so the SEC has to decide how that advertising will work. Is a tombstone ad the limit? Or can companies set up websites to talk up the new offering? What about TV ads? Securities and advertising are like oil and water. They don't mix. But somehow the SEC will now have to blend these two and still manage to protect the unsuspecting investor.

The only caveat on the advertising is that all the investors must be accredited. This usually means the investor must have a net worth of $1 million and income in excess of $200,000 per year for an individual and $5 million for a business set up to acquire the investment. The SEC has to write rules around the verification of these accredited investors.

Back in the good old days of brokerages, you knew if your client had this net worth, now who knows? What if the client says their home in Florida is worth $500k, when in fact it isn't? Or what if they value Grandma's jewels at $1 million when they aren't? How can this be checked online? It can't. So somehow, the SEC has to figure out the parameters around ads and then also figure out a way to make sure the ads are seen by the appropriate people.

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