CFIRA Offers Alternatives to Proposed SEC General Advertising Rule

The Crowdfund Intermediary Regulatory Advocates took aim at some new proposals offered by the SEC that would increase regulations of advertisements for private placements of equity enabled by Congress’ passage of the Jumpstart Our Business Act. In a letter issued this week on behalf of CFIRA by Kim Wales, Board Member and Executive Committee Member of CFIRA, pointed out the new regulations miss the JOBS Act intent of to spur economic growth and job creation through providing capital formation to small and emerging companies. CFIRA’s entire letter is posted below.

The Security and Exchange Commission’s initial set of rules authorizing general solicitation under Rule 506 Regulation D took effect on September 23, 2013. A public comment period for additional rules proposed by the SEC also closed on September 23, 2013. CFIRA’s objections to the additional rules are summarized as follows.

1.  Proposed Amendments to Rule 503 of Regulation D, Form D Advance Filing

Kim Wales

Kim Wales

CFIRA challenged the SEC’s proposal to amend Rule 503 of Regulation D to require (1) the filing of a Form D no later than 15 days in advance of a general solicitation followed by (2) a closing form D amendment 20 days after the Rule 506 offering as being “inconsistent with the principles of the JOBS Act for general solicitation and advertising.”  Currently, Rule 506 requires an issuer to file a Form D no later than 15 days after the first sale of a securities. The new rule would add a 15 day cooling off period. “For small issuers, the additional/pre-filing will increase the cost of raising capital because there will be two Form D submissions to the Commission and legal fees would be incurred before an actual sale of a security is made,” Ms. Wales wrote on behalf of CFIRA.

CFIRA’s recommendations?  CFIRA proposes either keeping the current rules for a Form D filing, or permit an issuer to file a Form D just prior to commencement of marketing.

2.  Proposed New Rule 509 of Regulation D

CFIRA contends the SEC’s proposal to require a legend — that is, a disclaimer that the advertising is offering a private placement of securities — is unworkable, especially in a world of 140-character tweets on media sites such as Twitter.  CFIRA recommends that the SEC requires prescribed legends on documentation such as pitch decks, business plans, PowerPoint presentations, sales brochures, and marketing websites that are used to sell an offering. “Where there are limitations in the number of characters that can be used, such as in the example of Twitter, the legending requirements of Rule 509 should not apply,” Ms. Wales added.

3.  Proposed Rule 510T

CFIRA called the SEC’s proposal that issuers submit any written general solicitation materials to the SEC no later than the day they launch their campaign as impractical. “Even with the best of intentions on the part of issuers, it is not reasonable to expect that small issuers will comply with the rule given their operational and financial capacity,” the letter noted. “And even if they did, the millions of submissions would likely overwhelm any database that the Commission creates for such a purpose.”

CFIRA’s Recommendation?

If adopted, Rule 510T should exempt a ‘‘small business’’ or ‘‘small organization’’ if it has total assets of $5 million or less as of the end of its most recent fiscal year and is engaged or proposing to engage in an offering of securities which does not exceed $5 million. This should include Funds that have net assets of $50 million or less as of the end of their most recent fiscal year.

4.  Rule 507 of Regulation D

The SEC proposes to disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply with all of the Form D filing requirements. This ban would last five years. CFIRA called the measure “draconian” that would impede access for small issuers. CFIRA proposed, instead, a “3 strikes” policy, which encompasses (1) a written warning, (2) a fine, and then (3) disqualification for a year. “Penalizing an issuer for one year for future offerings appears excessive at the outset of implementation,” the letter added.
CFIRA JOBS Act Title II Comments

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