Two Republican lawmakers say the SEC's investor-protection measures for private placement ads limit free speech. The response from one state securities cop? "Absurd!"
A prominent state securities regulator today sharply countered a request by Republican lawmakers for the Securities and Exchange Commission to withdraw investor-protection proposals for private-placement offerings, characterizing their reasoning as “absurd.”
In a July 22 letter, Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Subcommittee on Capital Markets, and Rep. Patrick McHenry, R-N.C., called on SEC Chairman Mary Jo White to nix the proposals, which were released on July 10 in conjunction with SEC approval of a rule that lifted the ban on advertising for unregistered securities sales.
The safeguards included requiring issuers of the sometimes-risky private securities to file a Form D notice 15 days before they start advertising. Under the proposals, small firms and others making solicitations would have to provide additional information to the SEC about the offering.
Mr. Garrett and Mr. McHenry equated the 15-day notification with impinging on the constitutional rights of a small firm or an entrepreneur to begin communicating with the public.
“Congress did not say that the commission can delay free speech for 15 days,” the lawmakers wrote. “The commission must withdraw this proposed prefiling requirement.”
A. Heath Abshure, Arkansas' securities commissioner, said the notice was intended to inform state regulators about pending private offerings and balance an easing of rule on capital raising with investor protection.
“To characterize that as a limit on free speech is absurd,” Mr. Abshure, who is president of the North American Securities Administrators Association, said in an interview.
Ms. White included the investor-protection package proposal with the advertising rule to address concerns about investor harm. The proposals were released for comment by the SEC in a 3-2 vote. It's not clear when or if they will be finalized.
Mr. Garrett and Mr. McHenry contend that the additional paperwork and other stipulations in the proposals would raise costs for startup firms seeking capital and effectively violate the law that contained the provision to allow advertising.
“The ban on solicitation imposed via a prefiling requirement would extend substantially longer than 15 days, particularly for smaller businesses that have reduced access or experience with complex legal matters,” they wrote.
Mr. Abshure said that Mr. Garrett and Mr. McHenry are essentially saying that there is no need for further regulation after the advertising ban is lifted.
“Reps. McHenry and Garrett fail to appreciate the need to balance the needs of business with the needs of investors,” Mr. Abshure said in a statement released by NASAA. “Such a failure would result in an unregulated 'Wild West' market in which their constituents will lose money.”
Under the advertising rule approved by the SEC, 4-1, private-equity and hedge funds, as well as issuers selling unregistered securities, can advertise to the public online and through social media, television and radio. The sales can only be made to qualified investors who meet net worth and income criteria.
The advertising rule is scheduled to go into effect on Sept. 23.
