Thursday, August 15, 2013

SEC Chair Responds to Concerns of House Leaders Around Rulemaking Implementing JOBS Act Lifting of Ban on General Solicitation under Regulation D

Responding to the concerns of House oversight leaders, SEC Chair Mary Jo White said that issuers and market participants can use the new Rule 506(c) exemption permitting general solicitation once it becomes effective on September 23, 2013 as long as they comply with the conditions of that exemption. In a letter to Rep. Patrick McHenry (R-NC), Chair of the House Oversight and Investigations Subcommittee, Chairman White also assured that issuers are not required to comply with any aspect of the Commission's July 10th rule proposal set forth concomitantly with the adoption of the exemption until such time as the SEC may approve a final rule and such rule becomes effective. Should the Commission ultimately decide to adopt final rules, the Chair expects that these rules would consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted the Rule 506(c) exemption.

On July 10, the SEC adopted regulations implementing Title II of the JOBS Act to end the ban on general solicitation under Rule 506 of Regulation D. Concomitant with the adoption of regulations lifting the general solicitation ban, the Commission proposed rules intended to enhance its ability to assess developments in the private placement market now that the rule to lift the ban on general solicitation has been adopted.

Specifically, under the proposal, issuers that intend to engage in general solicitation as part of a Rule 506 offering would, in addition to the current requirements, be required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering. In their letter to the SEC, Rep. McHenry and Rep. Scott Garrett (R-N.J.), Chairman of the Subcommittee on Capital Markets, said that the rule proposals unnecessarily burden private issuers by increasing regulations and disclosure requirements that effectively preserve the ban on general solicitation. They reasoned that, since Title II of the JOBS Act lifted the ban on general solicitation for Regulation D Rule 506 offerings to accredited investors, the proposed Form D filing requirements would effectively violate Title II.

In her response, Chairman White pointed out that the JOBS Act required a significant change in the Rule 506 marketplace by mandating that the Commission eliminate the ban on general solicitation in Rule 506 securities offerings. She reaffirmed her statement at the open meeting that the Commission had a responsibility to implement this Congressional mandate expeditiously, while at the same time closely monitoring and collecting data on the changes to the Rule 506 market to assess whether non-accredited investors are participating in this market, to observe the practices that issuers and market participants are using, and to evaluate whether the changes are creating new capital raising opportunities, and assess whether and to what extent the changes in the private offering market lead to additional fraud. The proposal is designed to provide the Commission with additional tools to assist in this effort.

In their letter to the Chair, the House leaders asked the Commission to modify certain aspects of this proposal or withdraw it entirely. With the comment period on the proposal underway, noted Chairman White, it would be premature to discuss the actions that the Commission may take with respect to the proposal generally or any specific aspect of it. The Administrative Procedure Act requires the Commission to give the public an opportunity to comment on a rule proposal for a period of time after it is published. The Commission is very interested in reviewing the comments that it receives on the proposal, said the SEC chief, adding that that the SEC will also give very careful consideration to the views of the House oversight chairs. Further, Chairman White pledged that any final rule is adopted will include a robust economic analysis, including consideration of the cost and benefits of the regulation.

The House leaders also requested information about staff time and related expenses dedicated to the Commission's rule proposal. Chairman White responded that the staff estimates that approximately 3,538 staff hours were spent on the proposal at an estimated labor cost of approximately $315,574. The labor cost reflects salary, but does not include other components of the Commission's labor cost, such as healthcare and other benefits.

Given that the rule proposal was part of a group of Rule 506-related rulemakings considered by the Commission on the same day, noted Ms. White, it was difficult for staff to isolate the time spent working on each of the rulemakings. Thus, she cautioned that, while the staff attempted to be as comprehensive as possible, some of the estimates may be overstated or understated.

In addition, the estimates do not include time spent by the Commissioners and their staff reviewing and considering the proposal, and do not include time by staff providing administrative support in connection with the proposals. In addition, the estimates do not include time spent either before or after the adoption of the JOBS Act in connection with the consideration of matters relating to the regulatory approach to lifting the restriction on general solicitation.

Normally, related Chairman White, staff do not track and record their time by specific project and, as a result, this information cannot be generated automatically from existing records. Nonetheless, the staff gathered certain information in an effort to provide the House oversight chairs with an estimate of the staff time spent on this project. To create the estimate, the Commission asked staff who worked on the rule proposal to provide their best estimates of their time spent on it. These staff estimates were based on the recollections of individuals of the approximate hours spent working on the proposal.

In addition, the time recorded in connection with this response only includes the time spent on the specific proposal considered and approved by the Commission on July 10, 2013. It does not include time spent either before or after the adoption of the JOBS Act in connection with the consideration of matters relating to the regulatory approach to lifting the restriction on general solicitation.

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