SEC Has ‘Open Investigations’ of Private Offerings to Accredited Investors

SEC has ‘some open investigations in several categories’ related to fraud and misconduct under Rule 506(c)

SEC Chairwoman Mary Jo White. (Photo: AP) SEC Chairwoman Mary Jo White. (Photo: AP)

The Securities and Exchange Commission is investigating whether some issuers of private placements properly vetted accredited investors, according to SEC Chairwoman Mary Jo White.

In a recent Q&A discussion at the 43rd Annual Securities Regulation Institute, held in late January in San Diego, White said that in relation to the SEC’s lifting of the ban on general solicitation under Rule 506(c) private offerings, “on the fraud/misconduct front,” the SEC has “some open investigations in several categories.”

One area, White said, “is actually in the area that is regulated, which is the reasonable efforts that issuers have to make to determine that who they’re selling to are accredited investors and either just not doing it at all or doing a job that clearly doesn’t pass muster.”

Rule 506 allows private placement offerings to accredited investors without the SEC filing requirements of a public offering. Rule 506(c), enacted under the Jumpstart Our Business Startups (JOBS) Act, allows public advertising of certain offerings.

Said White: “There are certainly, as you have in any market, some instances of fraud, but what we don’t see yet and hope we don’t, is evidence of rampant fraud in that market, obviously something we have to stay very vigilant about.”

White noted that while 506(c) is “being used, … it’s not being used perhaps as much as some would have thought it might be.”

Rule 506(b), she added, “where there isn’t general solicitation” continues to be “a hugely vibrant market.” From 2013, when 506(c) became effective, through 2015, White continued, “you had about $2.8 trillion sized market for 506(b) and about a $71 billion market for 506(c). So that gives you a sense of the difference in the use of those exemptions.”

This year, White added, “and again, not to over conclude from this, … the size of the 506(c) offerings are getting bigger by size, not in numbers, but in size.”

As to the changes that SEC staff has proposed to change the accredited investor definition, which remains open for comment, White said that in her view, the rules defining accredited investors “needs changing.”

Said White: “I don’t think, at least alone, that the net worth and income criteria by themselves are a very good or at least not optimal proxy for who doesn’t need the protections [of the Securities Act], who can fend for themselves in the marketplace. There are number of alternatives that are discussed in [the SEC staff study on accredited investors] that are being considered as, again, proxies for sophistication and being able to fend for yourself depending on your background, your professional qualifications, how much you have been involved in investing.”

White also noted that 2016 should be a “very busy year” in terms of rulemakings.

What’s left in major categories of mandated Dodd-Frank rules, White said, is “to finish Title VII, the over-the-counter securities-based swap regulations. We’ve proposed all of those rules. In 2015, we adopted a number of them, but we have to finish those adoptions and then the executive comp rules, all of which we did propose or adopt in 2015. So they’re on our agenda for 2016.”

Also on the 2016 agenda is “fiduciary duty for broker-dealers and advisors, third-party exams for investment advisors,” White said. “There’s a lot more.”

--- Check out SEC Proposals Aimed at ETFs May Chase Investors Into ETNs on ThinkAdvisor.

Reprints Discuss this story

Most Recent Videos

Video Library ››