Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

On August 29, 2012, the SEC issued a proposal for new Rule 506(c) under the Securities Act, which would implement the mandate of the JOBS Act to allow for the use of general solicitation and advertising in private offerings where the only purchasers are accredited investors.  Since the proposal’s release, the SEC has been receiving comment letters from state securities regulators, individuals, and trade groups.  Despite the expiration of the public comment period on October 5, the SEC continues to receive and post comment letters.  We’ve previously reported on some of the major comment letters (here and here); this post examines the best of the rest.

A number of state securities regulators who are members of the NASAA submitted individual comment letters, which generally call for the SEC to take four steps:

  • Specify safe harbors for verification methods that satisfy the “reasonable steps” standard;
  • Implement the bad actor disqualifications called for by the Dodd-Frank Act and previously proposed;
  • Require a Form D filing in advance of the use of public advertising; and
  • Place reasonable restrictions on the content of public advertising.

These sentiments are shared by regulators from Hawaii, Missouri, Montana, Nevada, Ohio, South Carolina, and Virginia.

Several state regulators also offer statistics to put Rule 506 offerings in context.  Virginia regulators took enforcement actions in 24 offerings in 2010 and 2011, which resulted in $12 million in losses to Virginia investors. In Montana, investors have lost more than $100 million in fraudulent Rule 506 offerings in the last four years. In South Carolina, fraudulent Rule 506 offerings are the number one complaint received by the attorney general’s office, and those complaints have more than doubled in the last two years.

The Small Business Investor Alliance doesn’t just call for the SEC to propose safe harbors for investor verification – it actually proposes several ideas for safe harbors, such as an investor self-certification combined with a firm commitment to invest at least $200,000 in a private fund.

Although they make up a minority of the comment letters, there are certainly individuals and organizations that believe the SEC has taken the right approach in the proposed rule and has stricken the right balance between preserving investor protections and removing roadblocks for small businesses to obtain crucial capital.  A letter from Artivest Holdings, Inc. calls the SEC’s rule proposal “thoughtful and measured,” argues that the existing securities law anti-fraud provisions are adequate, and cautions that any safe harbor would quickly become a de facto minimum threshold. Similarly, a joint letter from the Securities Industry and Financial Markets Association and the Financial Services Roundtable concurs that the flexible approach proposed by the SEC will accommodate the varying circumstances of each issuer, offering, and investor.

Several commenters seem to have written for the sole purpose of congratulating the SEC on its perfect rule proposal, including BlackRock and the Biotechnology Industry Organization.

But as a group, the comment letters also provide some unexpected comedy in the form of anonymous rants, personal attacks on state securities regulators, and comments from individuals that primarily exhibit a deep and troubling misunderstanding about the nature of securities laws.  For that reason alone, it’s worth spending some time browsing the full set of letters at the SEC’s comment letter page.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.