Wednesday, December 11, 2013

Senator Levin Urges SEC to Toughen Proposed Monitoring of Reg. D Post Ending of General Solicitation Ban

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.