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December 09, 2013 at 07:47 AM
Securities and Exchange Commissioner Luis Aguilar told consumer advocates Thursday that every day the agency fails to adopt its proposals regarding Rule 506 private offerings under Regulation D is “another day that investors face greater harm.”
“Unfortunately, notwithstanding the ‘real-world’ evidence, we have recently seen a focus on legislation — such as the JOBS Act —that seems to prioritize making ‘capital-raising’ quicker and cheaper, while often overlooking what is required for real capital formation,” Aguilar told attendees at the Consumer Federation of America’s financial services conference in Washington. “The clearest example of this is the new general solicitation provisions in Rule 506 of Regulation D, which were enacted without including the investor protections that many investors, academics and state regulators recommended.”
He said the risks of Rule 506, which allows general advertising of private offerings, were “well documented,” citing recent statistics by the North American Securities Administrators Association that found Rule 506 offerings were “still the most frequent source of enforcement cases conducted by state securities regulators.”
General solicitation, Aguilar continued, “simply exacerbates this problem by enabling potential fraudsters to cast a wider net.” He said that he agreed with NASAA’s prediction that scam artists were likely to use general solicitation under Regulation D “to their advantage.”
Said Aguilar: “Like NASAA and many others, I am concerned that removing the prohibition on general solicitation, without strengthening investor protections, puts investors at risk.”
When the commission adopted the amendment to Rule 506, the agency directed the SEC staff to execute a comprehensive work plan to review and analyze the use of the new exemption. The work plan includes, among other things:
- Assessing whether availability of the new exemption actually facilitates new capital formation;
- Monitoring the market for increased risks of fraud;
- Incorporating an evaluation of Rule 506(c) offering practices in staff examinations of registered broker-dealers and registered investment advisors; and
- Coordinating with state securities regulators on information sharing.
However, “for this work plan to be successful, the commission needs access to timely and useful information regarding the use of the Regulation D exemptions,” Aguilar said.
