Saturday, November 24, 2012

In Letter to SEC, Rep. Waters Concerned witb Verification Process under Proposed Regulations Implementing JOBS Act Ending of Reg. D General Solicitation Ban

In a letter to the SEC, Rep. Maxine Waters (D-CA) expressed concern that proposed regulations implementing the JOBS Act termination of the Regulation D ban on general solicitation does not adequately define the reasonable steps issuers must take to verify that purchasers of securities under the new offering exemption are accredited investors, consistent with the mandate in Section  201 of the Act. While the proposal suggests that self-certification would be an inadequate form of verification in instances where an issuer solicits new investors through a website accessible to through a website accessible to the general public or through a widely disseminated email or social media solicitation, said the prospective Ranking Member on the Financial Services Committee in the 113th Congress, the Commission fails to set forward what steps would be required in these circumstances and leaves open the possibility that self-certification may be acceptable in other circumstances.

As a Member of Congress deeply involved in the legislative drafting of Section 201, Rep. Waters emphasized that self-certification was never contemplated to be an adequate form of verification. She urged the SEC to consider defining specific, additional verification requirements, particularly relating to the protection available to natural persons claiming accredited investor status. The senior member also asked the SEC to consider requiring some form of third-party verification, such as letters from attorneys, accountants, or broker-dealers.

In addition,  and related to the issue of protection of natural persons, Redp. Waters believes that the Commission should consider amending the definition of accredited investor in light of the expansion to Rule 506 provided in the JOBS Act. Despite Section 413 of the Dodd-Frank Act, which precludes changes in the net worth threshold in the accredited investor definition before 2014, the Representative believes that the SEC has the authority to adjust this definition.

Rep. Waters also urged the SEC to set standards for the reporting of performance and fees by hedge funds and other private funds using the offering exemption proposed under Rule 506(c). Given that the SEC has acknowledged that hedge funds in  particular pose heightened risks to investors, reasoned Rep. Waters, it would be appropriate to establish clear reporting standards before allowing such funds to advertise or solicit the public.

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