Ahead of the August 22 SEC Open
Meeting, the North American Securities Administrators Association urged the
Commission to follow the standard rulemaking process by publishing for comment
a specific proposed rule and not adopt an interim rule implementing the JOBS
Act elimination of the ban on general solicitation under Regulation D. In a letter to the SEC, the NASAA said that, given
the complexity of the issues involved in the changes to Rule 506, plus the
enormous impact those changes will have on how these risky investments will be
offered, the Commission should follow
its normal course of publishing the proposed rule for public comment before it
becomes effective. While
cognizant that the Commission could adopt an interim rule with a subsequent
comment period, NASAA is highly doubtful of the Commission’s ability to make
any significant revisions to a temporary rule once in place, especially a
temporary rule with overly broad exemptive provisions.
While also aware that the JOBS Act contains a
90-day limit for the changes to Rule 506, NASAA noted that many of the
rulemakings required by the Dodd-Frank Act are long overdue. The state
securities group encouraged the Commission to prioritize investor-protection
rules ahead of the exemptions in the JOBS Act, and to resist the pressure to
act hastily, especially where ill-considered changes could have such
devastating impacts on investors.
Many
proponents of the changes to Rule 506 suggest the amendments are simple and
straightforward, and the NASAA appreciates the pressure the Commission is under
to act quickly. However, the Commission must grapple with some very complex
issues in its rulemaking. For example, the Commission must establish what it
means for an issuer to take reasonable steps to verify that all purchasers are
accredited. Also, the SEC should provide clarity by articulating the scope of
ancillary services and compensation that are permissible for unregistered
platforms. To avoid damage to federal and state enforcement efforts, said the
association, the SEC should also make changes to the Form D and its filing
requirements.
The Commission has an obligation to conduct a rigorous
cost-benefit analysis of rule changes, said the association. Although NASAA does not believe that
regulatory decisions based strictly upon costs and benefits necessarily yield
the right results, the Commission should apply the same standards to an
exemptive rulemaking that it applies to other rules that are less popular with
the business community. A proper analysis of costs and benefits would require
the Commission to defer action until comments are received on proposed changes
to Rule 506.
In
this particular rulemaking, observed NASAA, the Commission’s evaluation of
costs must include the losses sustained in low-quality investments that are
marketable under the newly-expanded Rule 506 but would never have been sold
successfully in a registered offering that required full disclosure. The costs
must also include the amount investors will lose in fraudulent offerings as a
result of the changes to Rule 506. In 2011, noted NASAA, states brought more
than 200 enforcement actions for fraudulent Rule 506 offerings. Unfortunately, NASAA
believes that the number of frauds and the amount of damages can be expected to
increase when it becomes easier to solicit victims under Rule 506.
In
addition, a failure of the new rule to strike the proper balance between
capital formation and investor protection will be very damaging to investors
and ultimately to the legitimate issuers who need investors. To craft the best
possible rule, advised NASAA, the Commission should first seek comment on a
specific proposal, not just general comments on the possible rules that could
be adopted under the JOBS Act.