Because
of the significance of the changes the Senators are requesting to the proposed
regulations, and because effectively implementing Section 201 is essential to
protecting investors and ensuring market integrity, the Senators ask the SEC to
re-propose a new regulatory framework for implementation of Section 201 of the
JOBS Act. The letter was also signed by Senators Carl Levin (D-MI), Richard
Durbin (D-IL), Tom Harkin (D-Iowa), Frank Lautenberg (D-NJ), Al Franken (D-MN)
and Daniel Akaka (D-Hawaii).
The proposal
emphasizes the need to provide sufficient flexibility to accommodate the
different types of issuers that would conduct offerings under the new Rule 506(c). The proposal further states that requiring
issuers to use specified methods of verification would be impractical and potentially
ineffective in light of the numerous ways in which a purchaser can qualify as
an accredited investor, and the potentially wide range of verification issues
that could arise. But in its effort to accommodate all types of issuers, noted
the Senators, the SEC proposal provides no certainty to issuers and fails to
ensure that only accredited investors participate in the offerings.
According
to the Senators, the "reasonable steps" language used in the JOBS Act
was specifically intended to ensure that only accredited investors participated
in private offerings,
and the provision’s author, Rep. Maxine Waters (D-CA), made it clear that self-certification
was inadequate. The Senators said that the proposed regulations must require
common-sense documentation and/or verification practices and procedures, thus
allowing the SEC to fulfill its mission to protect investors, while providing
needed, bright-line certainty for issuers and investors. In addition, the proposal
appears to misconstrue Section 201 as a mandate to remove any and all
regulation of general solicitation.
However, the statute and legislative history reflect the intent to only
remove the prohibition on general solicitation.
Congress
could have removed from the SEC any authority to condition, limit, or otherwise
regulate the manner or substance of general solicitation, reasoned the
Senators, but instead Congress elected to allow the Commission to retain its
authority to regulate this new allowance for general solicitation in offerings
exempt from registration pursuant to Rule 506 or Rule 144A. As such, the Senators urged that the proposal
be significantly revised to provide clear, objective, and meaningful regulation
of the manner and substance of general solicitations that may be allowed in
private offerings.
Also,
the Commission should take into account the nature of the securities being offered. In providing a solid regulatory framework
within which to permit general solicitation regarding
certain private offerings, they noted, the Commission should distinguish
between issuers that engage in operational businesses and those that are merely
investment vehicles.
Congress
did not contemplate removing the general solicitation ban-without retaining any
limitations on forms of solicitation for private investment vehicles. Indeed, continued the Senators, no argument
was made during the debate of the bill that the objective was to ease the
capital aggregation process for private investment vehicles. The words "hedge fund," ''private
fund," or "investment vehicle" were not used either during the
committee or floor debate in the House of Representatives, they emphasized, nor
did the Senate engage in any debate relating to removing these advertising and
marketing restrictions completely from private investment vehicles.