Preliminary Information on Misuse of the Private Placement Exemption--Section 4(2) of the Securities Act of 1933

FGMSD-80-55: Published: Apr 28, 1980. Publicly Released: May 1, 1980.

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Information was requested on the results of a GAO review currently in progress of the use of an exemption under the Securities Act of 1933. Under the Act, a securities issue must be registered with the Securities Exchange Commission (SEC) unless the issue is exempt from registration. The private placement exemption, for issues sold to investors in private transactions, states that registration requirements shall not apply to "transactions by an issuer not involving any public offering."

A 3-year investigation by the SEC revealed 142 cases involving misuse of the private placement exemption. Investors suffered serious losses as a result of being sold securities which were improperly represented as privately placed issues. The investors were not given the accurate and complete information which would have been available to them had the securities been registered as public offerings. The investigation did not indicate that the purchase of fraudulent securities was also a problem for institutional investors. It was observed that serious misuses of the exemption have occurred because: use of the exemption has been a continuing source of uncertainty; SEC does not always receive notification of exemption use; and SEC does not have timely access to promotional literature and other information. Options are being considered by GAO for presentation to Congress for its consideration in deciding what changes could be made in this area to protect the investor more effectively without inhibiting the legitimate raising of capital through the private placement exemption.

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  • finance icon, source: Comstock

    Priority Open Recommendations:

    Department of the Treasury
    GAO-20-549PR: Published: Apr 23, 2020. Publicly Released: Apr 30, 2020.

Apr 27, 2020

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