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SEC’s Investment Advisory Committee Recommends Filing of General Solicitation Material

Posted in Rule 506 Rulemaking

The SEC’s Investment Advisory Committee has recommended that the SEC should require issuers relying on the exemption from the ban on general solicitation and advertising to file a form as a precondition for claiming the exemption, and also file with the SEC general solicitation and general advertising material they use in private offerings that rely on the exemption.

The committee published its recommendations on October 15, 2012 in its report, “Recommendations of the Investment Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings:  Efficiency Balancing Investor Protection, Capital Formation and Market Integrity.”

The committee’s recommendations follow the SEC’s action on August 29, 2012 to propose rules implementing the JOBS Act mandate to eliminate the ban on general solicitation and general advertising in Rule 506 private placements.  Lifting the ban, the committee said, can and should be done “in a manner that simultaneously promotes investor protection, facilitates efficient capital formation, and provides regulators with the tools they need to police the market effectively.”

The committee suggested that the SEC “give strong consideration” to its recommendations, including:

  • Require issuers intending to rely on the new JOBS Act general solicitation exemption to file either a new “Form GS” or a revised version of Form D as a precondition for claiming the exemption.
  • Require that issuers file with the SEC all solicitation material prepared or disseminated on its behalf in a general solicitation or advertising campaign in reliance on the      exemption through an online electronic “drop box.”
  • Adopt a safe harbor that “provides clear and enforceable standards” for verification, as opposed to reasonable belief, of accredited investor standards to promote reliance on reliable third parties, including broker-dealers, banks and licensed accountants.
  • Make the filing of Form D a condition for relying on the Regulation D exemption (currently, the filing is not a condition for relying on the Regulation D exemption).
  • The SEC should take steps to ensure that performance claims in general solicitation materials “are based on appropriate performance reporting standards.”
  • Amend the definition of “accredited investor” to better reflect the financial sophistication of “natural persons.”
  • The SEC should promptly adopt a “bad actors” rule to disqualify felons, as required by Section 926 of the Dodd-Frank Act.

Section 911 of the Dodd-Frank Act established the Investment Advisory Committee to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, and the effectiveness of disclosure and the integrity of the securities marketplace.  The Dodd-Frank Act authorizes the committee to submit its findings and recommendations for review and consideration by the SEC.

Senator Carl Levin of Michigan also weighed in on the SEC’s proposed rule. In a letter dated October 5, 2012 to the SEC, he cited two “significant flaws.”  The first is that the proposed rule fails to adequately outline “reasonable steps” necessary to be taken by the issuer to ensure that all investors are accredited.  The second is that the proposed rule fails to meaningfully regulate permissible solicitation and advertising so as to protect investors from deceptive advertising, inappropriate or unfair sales tactics and investment fraud.