The Securities and Exchange Commission will not withdraw a JOBS Act related rule proposal despite calls to do so by Congressional Republicans. Contrary to the concerns of critics, and even though the new disclosure requirements have yet to be finalized, the newly granted ability of issuers to advertise their private offerings will not be delayed, says SEC Chair Mary Jo White.
In a July 22 letter to White, Congressman Patrick McHenry (R-N.C.), chairman of the Financial Services Subcommittee on Oversight and Investigations, and Congressman Scott Garrett (R-N.J.), chairman of the Financial Services Subcommittee on Capital Markets, questioned the legality of proposed rules tagged onto the recent removal of a longstanding ban on general solicitation and whether new disclosure demands would further postpone a long-delayed legislative mandate.
The letter specifically addresses Proposed Rule 503, which requires private issuers to file an expanded Form D. They claim this proposal unnecessarily burdens private issuers with disclosure requirements that “effectively preserve the ban on general solicitation.”
On July 10, the SEC adopted a rule to implement the Jumpstart Our Business Startups Act requirement to lift the ban on general solicitation and advertising for certain private securities offerings. Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Rule 506 of Regulation D is the most widely-used exemption. Congress directed the SEC to remove the prohibition on general solicitation for Rule 506 offerings if sales are limited to accredited investors.
The SEC added the Rule 503 proposal to require that issuers provide additional information about these securities offerings. They would be required to file Form D at least 15 calendar days before engaging in general solicitation for the offering. Within 30 days of completing an offering, they must update that information and indicate the offering has ended.
The proposal expands upon the traditional, basic information disclosed on Form D. It calls more information on the issuer, the offered securities, and the types of investors in the offering. The methods used to verify accredited investor status must be described. The SEC would also requires issuers to submit their written general solicitation materials via a public, online portal.
In an Aug. 8 letter to McHenry and Garrett, White defended the rule proposal. The Commission must “closely monitor and collect data on the changes to the Rule 506 market,” she said. This will allow it to observe the practices that issuers and market participants are using, evaluate whether the changes are creating new capital raising opportunities, and assess whether changes in the private offering market are leading to additional fraud.
White said it would be inappropriate to modify or withdraw the proposal at this time.
“As we are currently in the public comment period, 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,” she wrote, adding that Garrett and McHenry's concerns would be duly noted in that public comment process.
White also addressed concerns that the rule proposal has created uncertainty among some issuers and market participants. Although the ban on general solicitation is now lifted, the proposed Rule 503 might seem to impose an additional waiting period. By proposing additional requirements the SEC has ensured that, “for careful issuers, the ban on general solicitation remains in place,” McHenry and Garrett wrote.
White explained that this interpretation is incorrect. Effective Sept. 23, 2013, issuers will be able to rely on the exemption for securities offerings. Issuers are not required to comply with any aspect of the July 10 rule proposal until the Commission approves a final rule and it becomes effective. That final rule would provide transitional guidance for ongoing offerings that commenced before the effective date.
In response to another query, White said that a total of 3,538 staff hours were devoted to work on the general solicitation rules. This cost the agency nearly $316,000, not including the cost of employee benefits.
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