Chairman Mary Jo White
July 10, 2013
Good morning. This is an open meeting of the Securities and Exchange Commission on July 10, 2013, under the Government in the Sunshine Act.
Today, we are considering three important items.
First, we will consider whether to adopt a Congressionally-mandated rule required by the JOBS Act to permit companies to use general solicitation and advertising to reach individuals who may wish to invest in securities offerings that are exempt from registration with the Commission. Under the rule, only “accredited investors” would be permitted to actually invest in these offerings.
Second, we will consider whether to adopt a rule required under the Dodd-Frank Act that would disqualify “bad actors” from participating in these securities offerings.
And third, we will consider whether to propose a new rule designed to enable the Commission to better monitor how general solicitation impacts the private placement market, and to provide additional safeguards as this market changes and new market practices develop.
Our capital markets are the envy of the world and a cornerstone of the financial system that our economy relies upon. The measures that the Commission will consider today relate to the process by which companies seek to raise money in our capital markets to fund their operations and continue to grow.
Under an existing provision of our securities laws — known as Rule 506 of Regulation D — companies can raise an unlimited amount of money through a private offering. But they are restricted in the way they can solicit investors, and they generally can only sell to accredited investors — that is, investors who meet certain financial thresholds. For many years, there has thus been a ban on generally soliciting for investors in a private securities offering.
The JOBS Act passed by Congress in April 2012 required a significant change in this marketplace in an effort to facilitate both capital formation and the accompanying creation of new jobs. Specifically, Congress mandated that the Commission eliminate the ban on general solicitation in Rule 506 securities offerings. Once the ban is lifted, issuers will be able to use a number of previously unavailable solicitation and advertising methods when seeking potential investors.
While the JOBS Act mandate is intended to provide new ways for companies to raise capital, concerns have been raised that doing so could result in more fraudulent conduct. There has been widespread public discussion and debate — and numerous comment letters — about how to best address these concerns and whether the Commission can and should defer lifting the general solicitation ban while we pursue and adopt related discretionary rulemaking designed to provide more investor protections in this new market.
In my view, given the explicit language of the JOBS Act as well as the statutory deadline that passed last July, the Commission should act without any further delay. This does not mean, however, that the Commission should not take steps to pursue additional investor safeguards if and where such measures become necessary once the ban on general solicitation is lifted.
I believe the Commission should closely monitor and collect data on this new market to see how it in fact operates, observe the practices issuers and market participants are using, and assess whether and to what extent the changes in the private offering market has led to additional fraud.
As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the Commission must always focus on strong investor protections, as we are today. That is why:
As advocated by many commenters, the Commission today also will consider adopting a rule that excludes bad actors from participating in this new market.
Along with this new general solicitation rule, the staff will continue to work on a study to review the appropriate definition of accredited investor in today’s marketplace.
We will immediately initiate a multi-Divisional review of the new market and the practices that will develop to ensure that our new rule is properly calibrated.
- And that is why we are simultaneously proposing other important measures to enhance our ability to collect information on the impact of allowing general solicitation and to bolster investor protections.
I am firmly committed to keeping consideration of this proposal on track so that the Commission is able to make an appropriate and timely regulatory response to the operation of the new rule permitting general solicitation. The information we gain from the staff’s simultaneous review efforts along with the comments we receive on the proposal will inform the actions we take in finalizing this proposal.
We want this new market, and the private markets in general, to thrive in a safe and efficient manner and the rules we adopt and propose today are designed to facilitate that objective.
I strongly support and urge the Commission to adopt all three measures before us today. Taken together, these measures will, in my view, carry out the Congressional objective to permit general solicitation while at the same time prohibit the participation of bad actors and ensure that we have the information necessary to effectively monitor the market and adequately protect investors.
Before I go any further, I want to express my deep gratitude to Lona Nallengara, the agency’s Chief of Staff, for his tireless and extraordinary work on these rulemakings. I also want to thank the members of my tremendous staff for their work and assistance on this.
* * *
We will begin by considering whether to eliminate the ban on general solicitation in offerings relying on Rule 506 of Regulation D. This Congressionally-mandated rule under Section 201(a) of the JOBS Act would permit general solicitation in offerings made under Rule 506 to accredited investors, provided that issuers of these securities “take reasonable steps to verify” that all purchasers of the offered securities are accredited.
The rule would specify both a principles-based approach to satisfy the verification requirement, and, as urged by a number of commenters, provide a non-exclusive list of methods that issuers may use to satisfy the verification requirement as it applies to natural persons.
Before turning to Keith Higgins, the Director of the Division of Corporation Finance, to describe the details of the rule, I would like to thank Keith Higgins, Tom Kim, Jon Ingram, Charles Kwon, Ted Yu, Karen Wiedemann, and Paul Dudek from the Division of Corporation Finance; Liz Sandoe and Josephine Tao from the Division of Trading and Markets; Norm Champ, David Grim, Doug Scheidt, Sara Crovitz, Holly Hunter-Ceci, and Alpa Patel from the Division of Investment Management; Craig Lewis, Scott Bauguess, Vanessa Countryman, Vladimir Ivanov, Rachita Gullapalli, and Ross Goetz from the Division of Economic and Risk Analysis; and Annie Small, Rich Levine, David Fredrickson, and Bryant Morris from the Office of the General Counsel.
Next, we will consider whether to adopt another important rule — this one mandated by Section 926 of the Dodd-Frank Act — which would bar felons and other bad actors from participating in an offering relying on Rule 506.
Before turning back to Keith, I want to thank Keith Higgins, Mauri Osheroff, Gerry Laporte, Karen Wiedemann, Johanna Losert, and Rebecca Targan from the Division of Corporation Finance; Scott Bauguess, Vladimir Ivanov, Rachita Gullapalli from the Division of Economic and Risk Analysis; Doug Scheidt, Barbara Chretien-Dar, Tram Nguyen, Ken McEnery, and Keith Kanyan from the Division of Investment Management; Annie Small, Rich Levine, David Fredrickson, Bob Bagnall, and Bryant Morris from the Office of the General Counsel; and Charlotte Buford and Laurita Finch from the Division of Enforcement. And finally let me mention that Gerald Laporte is participating in his last open meeting. As many of us know, Gerry is on his second tour of duty at the SEC. For the past 10 years, he served as Chief of the Office of Small Business Policy in the Division of Corporation Finance. And in the 1980s he worked in both the General Counsel’s office and as a counsel to Commissioner Grundfest. Throughout his entire tenure, Gerry has proven himself a dedicated public servant and a strong advocate for small businesses and investors. Thank you, Gerry, for your service to this agency and for investors.
Now, we will consider a rule proposal designed to provide more information to the Commission to track the Rule 506 market after the general solicitation ban is lifted and to provide additional investor protection safeguards that the Commission staff is recommending in light of the ban being lifted.
The measures being proposed include:
Expanding the information that issuers must include on Form D — a filing that has always been required for every Rule 506 offering — so that the Commission has more information about the issuers and the offerings in this market.
Requiring issuers to file the Form D before the general solicitation begins, so that the Commission has timely information about issuers that attempt to use Rule 506.
Requiring issuers to file a Form D when an offering is completed, so that the Commission is provided with a more complete picture of the offerings that are conducted in this market.
Putting in place an effective mechanism for enforcing compliance with Form D filing requirements.
Requiring legends in general solicitation materials that would inform potential investors of risks as well as the statutory mandate that sales are limited to accredited investors.
Requiring, on a temporary basis, that issuers submit their written general solicitation materials to the SEC so the Commission can monitor the solicitation practices that issuers employ.
- Amending Securities Act Rule 156 which currently contains guidance regarding the sales literature used by public funds. The amendment would apply that guidance to the sales literature used by private funds generally soliciting under the new rule.
This proposal would provide for a 60-day period for comments, which the staff will carefully review with an eye toward expeditiously preparing a final rule for the Commission’s consideration.
Before turning to Keith to further outline the proposal, I would like to thank Keith Higgins, Tom Kim, Jon Ingram, Charles Kwon, Ted Yu, and Karen Wiedemann from the Division of Corporation Finance; Norm Champ, David Grim, Doug Scheidt, Diane Blizzard, Mark Uyeda, Sarah Buescher, Melissa Gainor, and Alpa Patel from the Division of Investment Management; Craig Lewis, Scott Bauguess, Vanessa Countryman, Vladimir Ivanov, Rachita Gullapalli, and Ross Goetz from the Division of Economic and Risk Analysis; and Annie Small, Rich Levine, David Fredrickson, and Bryant Morris from the Office of the General Counsel.