Regulation And Legislation

State regulators blast SEC over Reg D ad proposal

Rule would open door to general solicitation for private securities

State securities regulators blasted the Securities and Exchange Commission Wednesday over the agency’s controversial proposal to end advertising restrictions on private placements.
The rule would open the door to general solicitation for private securities issued under Rule 506 of SEC Regulation D. The change is mandated under the Jump-start Our Business Startups Act.
“Overall, we are greatly disappointed in the proposed amendment to Rule 506,” the North American Securities Administrators Association Inc. said in a comment letter today.
“It fails to give sufficient guidance to issuers, even though that type of guidance is mandated by the JOBS Act, and it fails to implement any protections for investors, even those that would be minimally burdensome to issuers,” the NASAA letter said.
“In short, the commission has neglected its duty to both issuers and investors,” the letter 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.
The SEC is taking comments on the proposal through Friday.
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.
In its letter, NASAA asked the SEC to set clear verification criteria and require issuers to file a form prior to soliciting any deal, so that state regulators could see who was taking advantage of the exemption.
Hedge funds and other issuers who support the rule change contend that the prohibition on solicitations is outdated and inhibits capital formation. They point out that the JOBS Act retained all of the anti-fraud protections under current law.
Prior to proposing the rule and asking for comment in August, the SEC had planned to approve an interim rule that would have immediately removed the advertising prohibitions.
But the agency backtracked after state regulators and investor advocates demanded that they be given an opportunity to see the proposal and comment.
Both NASAA and SEC spokesman John Nester declined to comment.