The Securities and Exchange Commission will not be passing an interim rule next week that would have let issuers of private securities, like hedge funds, immediately begin to make solicitations to the public.
Instead, the commission will issue a proposed rule with a public comment period, according to SEC spokesman John Nester.
SEC chairman Mary Schapiro "believes it is important for the general solicitation rule to be proposed for public comment, as is our typical practice in rulemaking," Mr. Nester said in a statement.
"This transparent process will provide the opportunity for feedback from companies, investors and market participants who may be impacted by the final rule," he wrote.
The SEC is meeting Aug. 22 to consider the rule, which once passed, will open the door to general solicitation for private securities issued under SEC Rule 506 of Regulation D.
The rule change is mandated under the Jumpstart Our Business Startups Act.
State regulators, consumer groups and unions blasted the SEC this week for its reported plans to pass a rule that would be immediately effective.
Opponents sent letters to the SEC, insisting the agency follow its usual public comment procedure.
The Investment Company Institute also had a letter in the works asking the SEC not to issue an interim rule, according to spokeswoman Stephanie Ortbals-Tibbs.
The SEC's about-face "doesn't guarantee a good rule, but it's the right thing to do," said Barbara Roper, director of investor protection for the Consumer Federation of America.
"She will take considerable political heat for this decision," Ms. Roper added.
Republican members of Congress, as well as president Obama, have urged the SEC to act quickly in removing prohibitions on private offerings.
The SEC already missed a July 4 deadline for eliminating the solicitation prohibition.
"While we recognize the importance of the statutory mandate and are committed to acting expeditiously the … deadline did not provide a realistic timeframe for the drafting of a new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input," Mr. Nester said.
Failure to provide an opportunity for comment could also subject the rule change to legal challenge, he said.
Rule 506 is a widely used exemption from securities registration that allows issuers to raise unlimited amounts of money from accredited investors. Current rules do not permit general solicitation or advertising of private offerings.
Investor advocates and state regulators argue that without the advertising prohibition, additional investor protections are needed, such as tighter verification mechanisms to ensure only accredited investors buy private deals.
Private securities are often higher-risk investments, illiquid, and are not required to disclose information like public companies.
But hedge funds and others argue that the prohibition on solicitations is outdated and inhibits capital formation, and that the JOBS Act retained all of the anti-fraud protections under current law.