Thursday, October 11, 2012

NASAA President Calls on SEC to Withdraw Rule 506 General Solicitation Proposal


NASAA President Heath Abshure has called on the SEC to withdraw a rule proposal that would allow the use of general solicitations in private securities offerings conducted under Rule 506 of Regulation D. In a teleconference yesterday with representatives from the AARP, AFL-CIO, Consumer Federation of America and Americans for Financial Reform, Abshure said that the rule, which is mandated by provisions in the JOBS Act, fails in its current form to implement any protections for investors, even those that would be minimally burdensome to issuers.

Abshure noted that Rule 506 offerings are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these risky and illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse. By releasing a proposed rule that does nothing more than recite what is already in the JOBS Act, Abshure stated, the SEC has neglected its duty to both issuers and investors.

Although Asbhure acknowledged that Rule 506 has been used by legitimate small businesses as an important source of capital, he stated that a healthy private placement marketplace requires investors who feel adequately protected. Accordingly, Abshure urged the SEC to adopt sensible and reasonable safeguards for investors.

In NASAA'S view, the SEC should propose a new rule that establishes specific steps that an issuer could take to verify that an investor is accredited. The new rule should also require the filing of a Form D in advance of any public advertising and place reasonable restrictions on the advertisements. Finally, the new rule should implement the bad actor disqualifications in Rule 506, as mandated by the two-year-old Dodd-Frank Act.

Abshure said that some of NASAA's suggestions, such as the change to the Form D filing deadline, would greatly assist the efforts of state securities regulators to police the market while being minimally burdensome to issuers. Other suggestions, such as accredited investor verification, are reasonable issuer requirements that facilitate the investor trust necessary to promote investment.

Although disagreeing with the policy choices made by Congress in much of the JOBS Act, NASAA realizes that the SEC has the responsibility of effectuating the Act’s statutory provisions. "This does not mean that the Commission may abdicate its responsibilities in promulgating rules," Abshure said.

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