Senator Carl Levin (D-MI) said
that the SEC’s proposal to monitor concerns over permitting issuers to engage
in general solicitation under Rule 506 pursuant to the JOBS Act do not go far
enough to protect investors from fraudulent offerings on what the Senator
called ``the soon-to-be "Wild West" that now exists under the final
Rule 506. In a letter
to the SEC, he urged the Commission to further enhance the proposal to ensure
that investors in Rule 506(c) offerings are provided with full disclosure
information and that such investors are actually accredited investors as
required by Congress.
Currently, a Form D is not
required to be filed until l5 days after a Rule 506(c) offering has commenced.
The Commission's proposes to require filing an Advance Form D before a general
solicitation offering commences. Senator Levin said that, rather than allowing
potential issuers to file an Advance Form D that contains limited information,
issuers should be required to file a full and complete Form D at least 15 days
before a general solicitation begins.
Senator Levin rejected the
idea advanced by Rep. Patrick McHenry (R-NC) in a letter to SEC Chair Mary Jo
White that a 15-day pre-solicitation filing requirement may violate the JOBS
Act. An examination of the statute and accompanying legislative history clearly
rebuts such a suggestion, he said. That a 15-day pre-solicitation filing
requirement does not violate the JOBS Act is clear from the legislative history
of the JOBS Act, he maintained, noting that pre-filing requirements are common
for offerings, and nothing in the JOBS Act or the legislative history suggests
that this legislation limits the Commission's authority to amend filing
requirements as it sees fit for Rule 506 offerings.
In fact, the Senator asked
the SEC to consider whether 15 days is an adequate amount of time for its staff
and state securities regulators to analyze filings for compliance and that
banned bad actors are not participating in new issuances. Whatever time period is adopted, he is concerned that
the Commission staff will not review each Advance Form D promptly after it has
been filed. If the Commission fails to review Advance Form D filings or take
action against those found to be deficient, he warned, the beneficial changes
put in place by the proposal will be largely lost. In addition to considering
whether 15 days is an appropriate amount of time for prefiling, he said that
the SEC should ensure that all Advance Form D filings are reviewed by staff
prior to the commencement of solicitation and that full Form D filings are
reviewed promptly after being filed.
Verification. He also urged the SEC to significantly strengthen the
verification requirements to ensure that investors in Rule 506(c) offerings are
in fact accredited investors. The legislative history of the JOBS Act makes
clear that Congress closely considered and intended for the lifting of the
general solicitation ban to be coupled with the requirement that only
accredited investors participate in these offerings. The safe harbor standards
for the verification of investor income and net worth that the Commission has
adopted unfortunately are far too wide and should be strengthened by requiring
additional documentation and verification.
The safe harbors should be
exclusive, he reasoned, because if they are not exclusive, then the Commission
leaves wide open the opportunity for issuers to adopt investor verification
regimes that meet the Commission's very low "reasonable steps" and
"reasonable belief'' standards for verification and allow considerable
leeway for non-accredited investors to be sold unregistered securities.
Thus, the SEC is undermining the fundamental principle of the JOBS Act, which is that only accredited investors can participate in Regulation D unregistered offerings. In addition, by relying on a "facts and circumstances" analysis, the Commission faces a difficult enforcement environment in which each fraudulent case that occurs under the general solicitation exemption will require the Commission to litigate the "facts and circumstances".
Also, the Senator said that the Commission should require that documentation
used by or on behalf of the issuer to verify an investor's qualification as an
accredited investor be maintained by the verifying party for a reasonable time
and be made available to the Commission for inspection on request.