Opening Remarks Regarding the Proposal of Rules Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
August 29, 2012
In recent years Congress has directed the Commission to promulgate a myriad of rules. When Congress directs the Commission to take an action, I believe that we have a duty to take that action, regardless of our personal feelings about the policy choices that Congress made.
I will, however, volunteer that I generally support increased flexibility in offering securities, particularly in the area of general solicitation. After all, in the time since the Commission promulgated Regulation D, technology has fundamentally altered the way that people communicate with each other. These advances in and of themselves should cause the Commission to consider whether to modify the current regulations governing the ways in which enterprises communicate with prospective shareholders and other investors.
As we take actions mandated by Congress, however, we must keep in mind the reasons that the securities laws were promulgated in the first place - in this case, why Congress first determined that it was necessary to establish a registration and disclosure regime for most offers and sales of securities. And we need to be cognizant that allowing general solicitation in the private offering market is a profound change in the laws governing the offers and sales of securities. As with all changes of this magnitude, there likely will be unintended consequences, and we need to understand those consequences and consider, within the bounds set by Congress, how to adopt a rule that mitigates any unintended harms. I believe that the perspectives and insights of commenters help us understand the unintended consequences of our actions, facilitate a more informed rulemaking process, and result in the adoption of a better rule.
Some of those who have already taken their own initiative to comment on the potential change before us today discussed several potential unintended consequences, notably the increased ease with which miscreants might perpetrate fraudulent offerings. These commenters also suggested actions the Commission could take to mitigate the risks that the proposed rule might pose. These thoughtful suggestions included requiring certain disclosures or legends to accompany general solicitation, amending the definition of accredited investor, and including additional information on Form D. Today's proposal does not include a meaningful discussion of these suggestions. While I am voting for today's proposing release, I am disappointed that these comments were not incorporated in the proposal, either as a component of the proposed rule or as requests for further comment. Even though the release does not address these issues, I would very much like to hear more from commenters about these important subjects.
One suggestion, in particular, that I would have liked to be included is the requirement for issuers to file Form D as a condition to using the proposed exemption. I think this condition would be important for several reasons. First, because general solicitation is currently prohibited for almost all private offerings, today the presence of general solicitation efforts in connection with a non-registered offering is a red flag, not only of a registration violation but also potential fraud. In a world where general solicitation is permitted, fraud could be more difficult to detect and to prove. Thus, it is important that the Commission and other regulators receive notice and basic information about offerings that are occurring in order to help prevent investor harm from fraud or other unlawful offerings.
In addition, this proposed rule, like many financial regulations, will have consequences that are difficult to predict and quantify. It is therefore imperative that once general solicitation is permitted, we study the effects of the rule as it is implemented. How is it affecting capital formation? How is it affecting the public and private markets? And how might it be affecting the incidence of illegal or fraudulent offerings? The data contained in Form D will inform this study. But, we know that data is incomplete. Notwithstanding the requirement to file Form D, many issuers fail to do so. This trend must change, and conditioning this exemption on filing Form D seems to me like an effective and minimally burdensome way for us to carry out our mission of investor protection, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Accordingly, I ask commenters on this proposal to consider and share their views about this suggestion, and in addition, about how we can amend Form D to increase the amount of useful information for studying capital formation.
I'd like to thank the staff for their hard work on this release, particularly those in the Division of Corporation Finance, the Division of Risk Strategy and Financial Innovation, and Office of General Counsel.