Four U.S. Senators urged the SEC to act promptly and without further delay to finalize and strengthen proposed investor protections for private securities offerings in the wake of the Commission’s rule allowing general solicitation and advertising of private securities offerings under Regulation D. A year ago the SEC implemented the JOBS Act ending of the ban on general solicitations and, so, for the last year, issuers have been allowed to use highway billboards, internet advertisements, cold calls to senior living centers, and promotional T-shirts to market their securities to investors, with no education for investors and limited disclosure of risks. In a letter to SEC Chair Mary Jo White, Senators Elizabeth Warren (D-MA), Jack Reed (D-RI), Carl Levin (D-MI) and Ed Markey (D-MA) expressed deep concern that, for the last year the Commission has allowed private securities offerings to take place using general solicitation and advertising without adequate investor protections.
Two safeguards are especially important and should be adopted without further delay, said the Senators. First, general solicitation materials that will be used by issuers, especially for private investment funds, should be filed with the Commission, and should contain risk disclosures. Such requirements will provide the Commission and other regulators with a more complete understanding of the general solicitation landscape, they noted, and will deter misleading advertisements.
Mutual funds, which generally are less risky to investors than private securities offerings, are required to submit advertising materials for review by regulators and are required to include specific risk disclosures in their advertisements. The Senators believe that private securities offerings, especially for private investment funds, should be subject, at minimum, to the same standards as mutual funds. They noted that similar requirements for submission of materials and uniform disclosure of past performance were recommended by the Commission’s Investor Advisory Committee in 2012.
Second, issuers should be required to file a Form D before engaging in general solicitation, and those who engage in general solicitation without filing the required Form D registration form, or who file improperly, should not be allowed to rely upon the Securities Act registration exemption until corrective action is taken. In the view of the Senators, current rules, coupled with lax enforcement, have resulted in an environment where there are few, if any, meaningful consequences for issuers that fail to file a Form D in a timely manner.
Form D is an important tool for federal and state securities regulators to be able to track and monitor offerings, and to target surveillance and education efforts appropriately. Without it, fear the legislators, a regulator’s first sign of a problematic offering may be a phone call from an investor who faces a lost retirement. The current regulation does not require a Form D to be filed until two weeks after an offering has commenced, and for many offerings, provides little incentive to file at all. Requiring pre-filing and adding a real consequence for failing to properly file with the Commission, such as the potential loss of the issuer’s Securities Act exemption, would provide better information to regulators and a much-needed incentive for issuers to comply with the filing requirements.