SEC Backs Off Issuing Private Offering Rule

Agency will release the rule proposal for public comment on Wednesday instead

SEC Chairwoman Mary Schapiro. (Photo: AP) SEC Chairwoman Mary Schapiro. (Photo: AP)

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After repeated complaints, Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro decided to back away from issuing on Wednesday an interim rule on general solicitation and advertising of private offerings under the JOBS Act and instead will put the rule out for public comment.

The agency was barraged with complaints from groups like the North American Securities Administrators Association (NASAA) and Americans for Financial Reform (AFR) that the securities regulator was circumventing its traditional practice of putting rules out for public comment before issuing them.

The rule in question would eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April.

While the SEC has been under increasing pressure from House Republicans to push the JOBS Act rulemakings through, NASAA President Jack Herstein told Schapiro in an Aug. 15 letter that while “We realize the JOBS Act contains a 90-day limit for the changes to Rule 506, we note that many of the rulemakings required by the Dodd-Frank Act are long overdue. We encourage the commission to prioritize investor-protection rules ahead of the exemptions in the JOBS Act, and we urge you to resist the pressure to act hastily, especially where ill-considered changes could have such devastating impacts on investors.”

SEC spokesman John Nester said that Schapiro “believes it is important for the general solicitation rule to be proposed for public comment, as is our typical practice in rulemaking.” This transparent process, he said, “will provide the opportunity for feedback from companies, investors and market participants who may be impacted by the final rule.” In addition, Nester said, “failure to provide this opportunity for comment could subject the rule to challenge that could delay the implementation of the statutory mandate.”

Indeed, Herstein said in his letter that the commission “must grapple with some very complex issues in its rulemaking.” For example, the SEC “must establish what it means for an issuer to take reasonable steps to verify that all purchasers are accredited, and the commission should provide clarity by articulating the scope of ancillary services and compensation that are permissible for unregistered platforms. To avoid damage to commission and state enforcement efforts, the commission should also make changes to the Form D and its filing requirements.”

AFR, which includes former securities regulators, leading securities law experts, and advocates for investors, workers and older Americans, told Schapiro to “abandon this rushed approach” of issuing an interim rule before releasing it for comment.

"In the 1990s," AFR said, “a previous experiment with lifting the general solicitation and advertising ban led to an immediate upsurge in fraud, causing the commission to reinstate the restriction. Since passage of the JOBS Act, advocates argue, both the magnitude of the risks and the complexities of the issues the commission must address in any rulemaking have only increased.”

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Read SEC Private Placement Rule Threatens to Put Investors at Great Risk by Jack Herstein of NASAA on AdvisorOne.

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