White Reported to Favor Lifting Ban on General Solicitation

By Cydney Posner

According to this article in Bloomberg, SEC Chair Mary Jo White is advocating that the SEC go ahead and adopt, as interim final rules, the current proposal to end the prohibition on general solicitation in Rule 506 private placements and Rule 144A offerings, with the expectation that additional protections could be included later as needed. Bloomberg reports that adopting "the regulation would allow White to make good on a promise she made in her Senate confirmation hearing to prioritize rules mandated by the Jumpstart Our Business Startups Act, which was designed to boost capital-raising and job creation. At the same time, it could anger advocates for small investors and at least one Democratic commissioner." The article reports that "White's plan would allow the commission to dispatch with a rule she has described as a first priority. ‘The SEC needs to get the rules right, but it also needs to get them done,' she told the Senate Banking Committee last month."

According to the article, these types of offerings "raised $905 billion in 2010, surpassing the amount of capital raised by any other type of offering, including public debt, according to a February paper by SEC economists. Sixteen percent were done by hedge funds, 15.3 percent by technology companies and 9.8 percent by health care firms, according to the SEC. State securities regulators say such offerings were the most common product leading to enforcement actions in 2011."

You might recall that, former Chair Mary Schapiro had originally planned to adopt interim final rules without even floating any proposal and to solicit public comment at the same time, but backed off that plan. (See my article of 8/20/12.) The SEC issued proposed rules instead. (See my article of 8/29/12.) According to the article, Schapiro retreated from her initial approach after receiving complaints, worried that "she would be ‘tagged with an anti-investor legacy,' according to internal SEC e-mails published by the House Oversight and Government Reform Committee. The switch angered Commissioner Daniel M. Gallagher, a Republican appointee, who said he was ‘furious' about the change."

The proposal that was issued has been widely criticized by consumer and investor advocacy organizations, as well as state securities regulators and at least one Senator, who were concerned that the proposal failed to even contemplate basic protections for investors. Two Democratic commissioners, Luis Aguilar and Elisse Walter, advocated that more safeguards should be included before adopting a rule lifting the ban. (See my article of 11/16/12.) Some also contended that the proposal was too flexible and advocated instead that the rule be more prescriptive in advising companies how to verify that investors are qualified.

According to Bloomberg, the two Republican commissioners have advocated adopting the proposed rule as written, while Aguilar "said this month that a rewrite is needed because the proposal was an ‘aggressive effort to exclude pro-investor initiatives.'" Reportedly, White has said internally that rewriting the rule would take too long, but has suggested as a compromise that the SEC issue a "concept release" soliciting comment on "how to bolster protections without obligating the SEC to implement them."

While Aguilar is advocating a complete rewrite, Walters seems to be staking out a more measured position. She testified recently before a House committee that the "important thing to do here is to analyze the investor protection issues that are present and see if some of them can be addressed…. They really do revolve mostly around who the investors are, rather than how they are solicited."

In a letter sent to the SEC, several investor advocates "cautioned White against moving ahead with the current rule proposal….'Some have suggested that the commission could implement the general solicitation rule based on the current proposal and pursue comment on the appropriate investor protections separately….Think of the precedent that would set -- rushing forward with the aspects of the rule supported by industry while offering the faint possibility that the commission might one day get around to addressing the concerns raised by investors.'"

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