SEC Opts to Take Its Time and Try To Get The Rule Right

In this year’s Jumpstarting Our Business Startups (JOBS) Act, Congress eliminated the prohibition on general solicitation or advertising in connection with private offerings of securities and required the SEC to adopt and implement Congress’s mandate via rulemaking within 90 days of the effective date of the Act. To meet this deadline, the SEC would have needed to issue an interim rule, which would have had an immediate impact on how capital raisers communicate with investors and the broader public.

As mandated by Section 201(a) of the JOBS Act, the interim rule would eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rules 506 and 144A under the Securities Act.

In the past two weeks, a broad array of trade groups, academics and private individuals filed comments with the SEC registering their concerns that immediate implementation of interim rules without first putting them out for public comment would potentially lead to confusion in the marketplace and harm to investors and capital raisers alike.

As stated by North American Securities Administrators Association President Jack Herstein in his August 15, 2012 letter to the SEC, the commenters are broadly requesting that the SEC “resist the pressure [from Congress] to act hastily, especially where ill-considered changes could have such devastating impacts on investors.” In addition, the commenters urge the SEC to avoid rushing an interim rule and carefully consider a host of complex issues, such as setting forth criteria for an issuer’s verification of a potential investor’s accreditation, articulating the scope of ancillary services and compensation that would be permissible for unregistered platforms, and revising Form D and its filing requirements in a manner that did not damage SEC and state enforcement efforts.

After consideration of the comments, SEC spokesman John Nester announced on Monday, August 20, 2012 that SEC Chairwoman Mary Schapiro decided the SEC would eschew the interim rule and instead utilize the traditional rulemaking process by allowing for public comment to “provide the opportunity for feedback from companies, investors and market participants who may be impacted by the final rule.” In addition, Nester said “failure to provide this opportunity for comment could subject the rule to challenge that could delay the implementation of the statutory mandate.”