The organization of state securities regulators (NASAA) has published a sharply critical comment letter in response to the SEC’s proposed regulations implementing the Jump Start Our Economy (JOBS) Act. Among other things, the Act eliminates the prohibition against general solicitation of investors for certain private offerings. NASAA basically accused the SEC of total abdication of its responsibilities of investor protection.
At the center of the controversy is SEC Rule 506, which provides an exemption from securities registration that is commonly used in private offerings. The current rule allows issuers to raise unlimited amounts of money from “accredited” investors, but does not permit them to generally solicit (advertise) private offerings.
The JOBS Act statute requires the SEC to amend Rule 506 to eliminate the ban on general solicitation. A regulatory rule normally fleshes-out the statute, providing more detail and guidance. NASAA found fault with the SEC’s proposed new Rule 506 because it provides no guidance and merely restates the pertinent part of the JOBS repealing the ban on general solicitation.
NASAA also found fault with the proposed rule because it fails to provide even minimal investor protections. One investor protection measure recommended by NASAA would require issuers wishing to claim an exemption from registration under Regulation D to file Form D prior to making a general solicitation in order. The measure would also provide for the loss of the exemption for failure to timely file (thus providing a string incentive to comply with the filing requirement). That seemingly common-sense measure would allow regulators and investors a fairly reliable way to see whether an offer at least purports to be exempt from registration under Rule 506. But the SEC’s proposed rule does not include such a provision or even request comment on it.
The SEC appears willing to allow public offerings of securities up to $1 million over the internet with little or no regulatory oversight. Already, so-called crowdfunding internet sites are gearing up in anticipation of the new SEC’s go-ahead.
NASAA has discovered more than 8,500 sites with the word “crowdfund” in their names, of which 1,600 have some content on their site (“Crowding into crowdfunding biz has regulators worried,” by Dan Jamieson, InvestmentNews). That number is thought to be conservative, according to the article. State regulators, who bring most of the anti-fraud enforcement actions, are worried that the SEC’s hands-off approach will open the floodgates of investor fraud.
Page Perry, LLC is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.