Recent years have brought significant changes to how securities offerings are conducted, with many of the more recent regulatory reforms regarding public offerings the result of the JOBS ACT. Delivering the keynote address at the Practising Law Institute’s annual Securities Regulation Institute, held this week in New York City, Securities and Exchange Commission Chairman Mary Jo White spoke about how both marketplace participants and her agency are responding to these changes.
Among the developments in recent years:
Creating a new class of issuers, well-known seasoned issuers (WKSI), and allowing automatic “shelf” registration statements that allows them to register securities on a more flexible basis, without requiring a waiting period.
Easing disclosure requirements on emerging growth companies, those with annual gross revenues of less than $1 billion during its most recent fiscal year.
Amendments to rules for exempt transactions under Rule 506 and Regulation A, including a soon-to-come exemption for crowdfunding.
Lifting the ban on general solicitations for Rule 506 offerings, provided that all purchasers are “accredited investors” and that issuers take reasonable steps to verify that status.
The goal is to continue to protect investors throughout the development of an ever-more dynamic and multi-faceted market for securities offerings.
What has the SEC learned? “These are dramatic changes for investors and issuers. We have an obligation to implement them in a way that protects individual investors, promotes a general confidence in the new markets, and is workable for issuers,” White said.
That is why, she explained, that there was, and is, an inter-divisional review of the new JOBS Act offering rules, bringing utilizing the expertise of the Division of Corporation Finance, Division of Economic and Risk Analysis, Enforcement Division, Office of Compliance Inspections and Examinations, and others to closely monitor practices as they develop.
While it may be too early to draw any conclusions about these new working groups, White did share some preliminary observations. Under Rule 506(c), issuers are taking advantage of general solicitation and advertising, but at a lower rate than issuers using the traditional exemption in Rule 506(b) that does not allow such activity. A record amount, $1.3 trillion, was reported as raised through Rule 506 offerings in the last completed calendar year 2014, but only a small fraction of issuers claimed the new exemption permitting general solicitation.
In terms of rule violations, they have been sparse. “We have some investigations open, primarily focused on companies’ failure to take reasonable steps to verify the status of investors, sales to unaccredited investors, unregistered broker-dealer activity, and some instances of possible fraud,” White said. “There has not been to date, however, a demonstration of the widespread fraud that some feared would occur.”
As for Regulation A+, which became effective in June, companies are beginning to take advantage of the new rules in greater numbers than was the case under the prior version of the exemption, with approximately 34 companies publicly filing offering statements and 16 companies filing non-public draft offering statements. SEC staff has qualified three offerings thus far.
The SEC will continue to evaluate the effectiveness of these changes to how securities offerings can be conducted and detect problems. An aspect of the new post-regulation framework is enhanced monitoring and assessment—particularly the implications for investors, White said. These monitoring activities will help better understand potential abuses, facilitate a rapid enforcement response, and identify potential inefficiencies compared to other channels for building capital, such as bank loans and private equity.
The Commission is also dedicated to “the use of smart, targeted regulatory adjustments and enforcement.”
“All too often, when investors or issuers have difficulties, there is a call for fundamental reform,” White said. “We should also consider targeted adjustments directed at discrete problems. In many cases, these measures can be accomplished faster than more structural changes, and they can carry an outsized positive impact, particularly for enhancing investor protection. The Commission’s rules for disclosure are a place where we do this…a focused approach to enhanced disclosure can make a real difference quickly and with considerable impact.”
“Sweeping reforms are not always required to address such changes, but the Commission should be regularly recalibrating and updating its suite of disclosure requirements to adapt to continual changes in the marketplace,” she added, stressing the importance of Corp Fin’s ongoing review of the current disclosure regime for public companies.