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Statement at SEC Open Meeting: Proposed Rules to Eliminate the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings

Commissioner Daniel M. Gallagher

Aug. 29, 2012

Thank you, Chairman Schapiro. I want to join in thanking the staff for their hard work on this proposal. I particularly want to take note of the tremendous hard work and fine lawyering of Tom Kim - it is no surprise to those of us who know him and it is a tribute to the agency that we have the services of such a consummate professional.

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After passage by overwhelming majorities in both Houses of Congress, the President signed the JOBS Act into law on April 5 of this year. The JOBS Act seeks to facilitate job creation - mainly by encouraging initial public offerings in the United States and by removing certain barriers to capital formation.

That's at the heart of what the SEC is supposed to do, and so the JOBS Act should feature prominently in the work of this agency. Our statutory mission, we are tireless in reminding folks, is threefold. Congress made fostering capital formation a central element of that mission.

With respect to this rulemaking, Congress's direction to the Commission was clear: Remove the ban on general solicitation and general advertising in our rules. The law says:

  • "(1) Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules … to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) … shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors."1

That doesn't leave us much choice. It's a bottom line provision - hence, the statute's 90-day fuse. Congress simply wanted us to reflect in our rules that Congress itself had decided to erase the ban on general solicitation. Significantly, Congress added that our amended rules must:

  • "require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission."2

Section 201(a) goes on to require that we amend our rules to permit general solicitation and advertising in connection with sales to qualified institutional buyers under our Rule 144A exemption, "provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer" under our rules.3

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So the main question in amending our rules as the statute requires is determining what would be reasonable steps to verify that "all purchasers of the securities" are accredited investors. Congress deferred to the SEC on how to get that done.

I believe that the Staff has come up with a reasonable proposal on how issuers can verify accredited investor status. I am, therefore, supportive of the substance of today's proposal - and I commend the Staff for creating a workable construct.

However, I am not happy to be sitting here today, almost two months after the JOBS Act deadline for a final rule, voting on a proposal. For months, the Commission had been told that the Staff was recommending that we vote on an interim final rule. That always made sense to me given the clear mandate we had to implement. Indeed, it still makes sense today. An interim final rule would have ensured that we had a final rule in place reasonably soon after the Congressional deadline.

In situations like today's - where we are charged with quickly implementing a mandate that gives us an unambiguous bottom line and leaves us little room for discretion, the Commission can, "for good cause" adopt an interim final release - a way to go ahead and make the required change, while at the same time soliciting market reactions to how the change actually works. Indeed, the draft interim final rule we were originally going to consider this month took into account the significant comments we had already gotten on this topic through the JOBS Act implementation comment portal on our website. We should be, and I wish we were, voting on an interim final rule today.

We could also have pursued a much more timely proposal, perhaps two or three months ago, that would have put us in a position to promulgate a final rule today. But, as I stated, the staff had chosen the path of interim final, and that made good sense. Then, earlier this month, we were told that the Chairman had reconsidered the draft interim final rule and wanted to re-cast it. Though I disagreed with that decision, I worked hard to accommodate changes in order to get the job done without further delay.

Despite multiple proposals for a workable interim final rule, we were told a couple of weeks ago that the Chairman was unwilling to move forward with an interim final rule at all - that it had been decided that we must issue a proposed rule, and that this was non-negotiable.

This involved making significant changes to the draft interim final release. After all, the difference between an interim final rule and a proposal is the difference between taking action while committing to monitoring implementation with an eye towards a final rule down the road, and, on the other hand, indicating the type of action we think we might take when we get to it. But I want to leave no doubt that, charged with quickly implementing Congress's explicit direction to implement a bottom-line mandate simply to remove the prohibition on general solicitation and general advertising in two well-traveled rules, we had plenty of "good cause" to employ an interim final rule as our chosen procedural tool. We'd have sent a less qualified and more welcome message to issuers whose need to efficiently raise capital drove Congress's adoption of Section 201(a) of the JOBS Act. It would have been a good thing - lawful and appropriate.

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And yet, we are today issuing a proposal - something we could have done months ago - proposing rules that may take until next year to be finalized in some form. The Chairman has informed us that the final rulemaking will be handled expeditiously, so I hope and expect that no effort will be spared to get a rule implementing Congress's simple mandate adopted in what remains of this year. I am supporting today's proposal only because I want -- five months after the JOBS Act became the law of the land -- this rulemaking process to proceed so that we can give effect to JOBS Act mandate and avoid substantive alterations that I could not support.

So let me be very clear. I am voting "yes" on the proposal, which is a matter of substance. But if I could, I would certainly vote "no" on the process that led up to this meeting, as well as the choice of proposal versus interim final rule.

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Despite all of this, I want to again thank the staff for their excellent work under tough circumstances.

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I have no questions.

1 JOBS Act, sec. 201(a)(1).

2 JOBS Act, sec 201(a)(1).

3 JOBS Act, sec. 201(a)(2).

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