The Securities and Exchange Commission (SEC) on Wednesday put out for public comment its controversial proposal on private-offering promotion under the JOBS Act.
After repeated complaints, SEC Chairwoman Mary Schapiro decided to back away from issuing the rule and instead 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) for circumventing its traditional practice of putting rules out for comment before issuing them.
The Commission will seek public comment on the proposed rules for 30 days.
At an open meeting on Wednesday, Schapiro said that Rule 506 “is one of the exemptions that has been widely used by U.S. and foreign issuers to raise capital without registering their securities offerings.” In 2011, she said, “the estimated amount of capital raised in these types of exempt offerings was just over $1 trillion, which is comparable to the amount of capital raised in registered offerings during this same period.”
These figures, she continued, “underscore the importance of these exemptions for companies seeking capital in the United States.”
When the commission adopted Rule 506 more than three decades ago, the agency said, “the issuer, or any person acting on its behalf, could use the exemption only if they were not offering or selling securities through general solicitation or general advertising,” Schapiro explained.
But the Jumpstart Our Business Startups (JOBS) Act directs the SEC “to lift this prohibition as well as a similar prohibition contained in Rule 144A of the Securities Act,” she said, and with respect to Rule 506 offerings, the Act “directs the Commission to permit such general solicitation, provided that all purchasers of the securities are accredited investors.”
The JOBS Act further says that the SEC’s rule “shall require the issuer to take reasonable steps to verify” an investor’s accredited status, using such methods as determined by the agency.
NASAA President Jack Herstein wrote in a recent blog for AdvisorOne that Rule 506 allows certain private placements to be sold to investors without SEC registration. “By definition, these are limited investment offerings that are highly illiquid, generally lack transparency and have little regulatory oversight,” Herstein wrote.