SEC Chair Says Request to Withdraw New Proposals for JOBS Act Rules is “Premature”
Washington, DC – SEC Chair Mary Jo White tells a House subcommittee that it’s premature to withdraw some new proposals that would place additional restrictions on how businesses can advertise their private placement offers under the JOBS Act. Ms. White responded to a request by Rep. Patrick McHenry (R-NC), chair of the House Subcommittee on Financial Services, that the Security and Exchange Commission withdraw proposals such as adding requirements that businesses file a Form D disclosure 15 days before they can launch an advertising campaign. Copies of the letters are posted below.
The General Solicitation Rules Take Effect on September 23
On July 10, 2013, the Securities and Exchange Commissions released rules mandated by Title II of the Jumpstart Our Businesses Startups Act that would lift the ban on advertising private placements of equity to accredited investors under Section 506, Regulation D. The rules are slated to take effect on September 23, 2013.
The New Proposals
The SEC also proposed additional rules that would, if adopted, create additional compliance burdens described as follows:
1. A Form D filing would be required before any general solicitation happens (rather than after the sale of securities as is the current requirement).
2. Updated “closing” Form D’s would be required for all 506 offerings once they terminate.
3. Require certain legends and other disclosures in offerings that use general solicitation (not a huge deal, because much of this is typically covered already in offering materials).
4. Require (at least for the next two years) that written general solicitation materials be filed with the SEC.
Rep. Patrick McHenry (R-NC), chairman of the House Subcommittee on Oversight and Investigations, and Rep. Scott Garrett (R-NJ), chairman of the House Financial Services Subcommittee on Capital Markets lambasted the new amendments, claiming the new rules run contrary to the intent of the JOBS Act. They further demanded in a joint letter on July 22, 2013 that the SEC provide some backup that justifies the new proposals. justification for certain rules that the chairs believed were contrary to the intent of the JOBS Act. “Although we support the Commission’s final rule implementing the lifting of the ban on general solicitation, the addition of the Proposed Rules, which require Regulation D 506(c) issuers to comply with new disclosure requirements, surmount additional regulatory hurdles and shoulder increased liabilities, create significant concerns,” Representatives McHenry and Garrett wrote. “Proposed Rule 503 requires a fifteen day waiting period, after filing Form D, before allowing advertisements – this restriction appears to violate the law by imposing a fifteen day ban on general solicitation. Title II of the JOBS Act lifted the ban on general solicitation for Regulation D 506 offerings to accredited investors. As a result, the Form D pre-filing requirement effectively violates Title II of the JOBS Act.”
The Representatives also criticized a proposed Rule 510T that requires issuers must provide the Commission with all advertisements by the date of first use, and the requirement for standard or “canned” disclosures attached to advertisements under proposed Rule 509. “Such disclosures, along with increased disclosure requirements under Form D, constitute the Commission’s unauthorized effort to impose a disclosure regime onto private issuers that is clearly outside the intent of Congress.”
The SEC’s Reply
On August 8, 2013, Ms. White replied in a letter that the SEC currently is seeking public comment on the additional rules, which are due no later than September 23, 2013, and these new proposals would not take effect on September 23. “Issuers are not required to comply with any aspect of the Commission’s July 10th rule proposals until such time as the Commission may approve a final rules and such rules become effective,” Ms. White assured the subcommittee. “Once effective, issuers will be able to rely on the Rule 506(c) exemptions for securities offerings as long as they comply with the conditions of that exemption.”
Since the new proposals are in the public comment phase, Ms. White advised the committee that “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 . . . Because your letter addresses a rulemaking for which the Commission is soliciting public comment, your letter will be added to our official comment file.”
In response to the subcommittee’s specific criticism of the new proposals, Ms. White observed: ”I also believe, however, that in connection with the implementation of this JOBS Act mandate, the Commission should closely monitor and collect data on the changes to the Rule 506 market to, among other things, assess whether non-accredited investors are participating in this market, observe the practices that issues and market participants are using, evaluate wither 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.”
Ms. White told the subcommittee that the SEC staff spent approximately 3,538 hours on the proposals at an estimated cost of $315,574.
Article by A. Brian Dengler, CFIRA member.
Letter by Patrick McHenry to the Securities and Exchange Commission.
Response by Mary Jo White to Rep. McHenry’s letter.