A Securities and Exchange Commission proposal to modernize regulation of private securities offerings has generated concerns from state regulators and some industry interests that it would blur the line between public and private deals.
The SEC is proposing to allow a tombstone type of advertisement for some private offerings as long as sales were restricted to a new category of qualified buyers called "large accredited investors," defined as people with at least $2.5 million in investments (excluding homes) or $400,000 in annual income ($600,000 with a spouse).
Current rules forbid any public marketing for securities offered under the SEC's Regulation D, which exempts private deals from securities registration.
Under the proposal, the SEC wouldn't let pooled investments such as hedge funds run the tombstone ads, but an operating company could run such announcements.
"The idea was that some small companies may not be able to hook up with a broker-dealer" to place a deal, said Michael Stevenson, securities division director for the state of Washington in Olympia, who was involved in preparing comments on the proposals for the Washington-based North American Securities Administrators Association Inc.
NASAA is opposed to any type of advertising. It supports allowing limited solicitation for deals sold to large accredited investors.
The Investment Company Institute is opposed to any type of advertising. Allowing tombstones for private offerings "represents a dangerous erosion of the long-established line between public and private securities offerings," Paul Schott Stevens, president and chief executive of the Washington-based ICI, said in a comment letter.
The ICI and other critics said that advertising or public solicitation would tempt issuers to accept money from unsophisticated in-vestors.
But state and federal regulation committees of the Chicago-based American Bar Association, and the Washington-based Managed Funds Association, which represents hedge funds, said in comment letters that the SEC should consider dropping entirely the prohibition on advertising and general solicitation — even for hedge funds.
A comment period on the SEC's proposal closed last month.
The package of proposed re-forms could affect a variety of industry players. All types of issuers raise capital from private offerings, from small startups to large public companies to private-equity firms and hedge funds.
The current proposals are separate from another plan the SEC floated in December that would have raised accredited investor standards for pooled investments, such as hedge funds, to the same $2.5 million investment threshold the SEC is now proposing for large accredited investors.
Currently, accredited investors must have a minimum of $1 million in net worth, including real estate, or earn at least $200,000 a year.
In the SEC's latest proposal, that standard would remain for offerings that were not advertised, and would be adjusted for inflation every five years, beginning in 2012.
But in a new twist, the SEC has proposed an alternative threshold for accredited investors based on an "investments owned" threshold of $750,000 for individuals.
This invested-assets test is widely supported as a better way than net worth or income to gauge suitability.
Additionally, the SEC is proposing to expand provisions that keep so-called "bad boys" from selling some private placements.
Under the current rule, Reg D disqualification provisions don't apply to most deals. And under federal law, the states are pre-empted from asserting their own bad-boy provisions.
State regulators have pushed to keep bad actors out of any type of private offering.
There are "hundreds of millions of dollars'" worth of fraudulent Reg D filings every year, said Joseph Borg, director of the Alabama securities commission in Montgomery and immediate past president of NASAA.
So it isn't a surprise that of the 50 to 70 enforcement orders Washington state gets from defendants each year, "well over half deal with unregistered [securities sales]," Mr. Stevenson said. Some are fraudulent, some are not, he said.
The ABA committees, though, said in their letter that any abuses are "best dealt with under the [SEC's] enforcement powers."
Mr. Borg said SEC enforcement cases against suspect private filers "don't exist."
The SEC doesn't even review Form D, which private issuers file with the agency, he said. "You can file forms all day long, but it does no good unless someone looks at them."
Industry interests say the bad-boy provisions, which currently apply only to offerings sold to non-accredited investors, are vague.
"If a firm was tardy [in filing] a Form D, would that disqualify a fund complex from using Reg D?" asked Michael Jurasic, an associate at Ropes & Gray LLP in Boston.
Industry lawyers say that even large, established Reg D players such as private-equity groups could be cut off from the private markets if some of their employees are technically disqualified.
Further, "it is unclear whether the disqualification provisions would apply retroactively," Mr. Jurasic said, so it's possible that past events might cause problems for an issuer.
In a separate but related rule filing, the SEC has proposed that Form D be filed electronically. The SEC is proposing to include a redesigned Form D on its EDGAR database, making the filings much more transparent.
Dan Jamieson can be reached at [email protected].
