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Senators Push for Tighter Rules With JOBS Act Offerings

Four Democratic members of the Senate want the SEC to adopt rules protecting investors from abuses in private securities offerings. The marketing ban on some limited offerings was lifted in 2013, and the lawmakers fear that investors are exposed to fraud because information about the market for the offerings is so scarce.

Four Senate Democrats urged SEC Chair Mary Jo White in a September 23, 2014, letter to quickly adopt rules protecting investors from abuses in private securities offerings.

“A wave of fraudulent schemes could hurt confidence in the integrity of our markets broadly, and unfortunately, today, investors are unnecessarily exposed to undue risks of fraud and financial loss,” Sens. Carl Levin of Michigan, Jack Reed of Rhode Island, and Edward Markey and Elizabeth Warren of Massachusetts, wrote on the first anniversary of the implementation of the rule that lifted the marketing ban on limited offerings in Release No. 33-9415, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings. The rule was mandated by the 2012 JOBS Act.

The senators said that in the past year businesses took advantage of the rule to use highway billboards, Internet advertisements, cold calls to senior centers, and promotional T-shirts to market their securities with limited disclosure of risks.

“We are deeply concerned that, for the past year, the commission has allowed private securities offerings to take place using general solicitation and advertising without adequate investor protections,” the senators wrote.

The lawmakers are particularly concerned that the SEC has let a year go by without strengthening the filing requirements for its Form D, which is used for the types of limited securities sales that don’t have to be registered with the SEC. The proposal called for issuers to submit a form to the SEC at least 15 days before the start of the offering’s marketing campaign.

The changes were proposed in Release No. 33-9416, Amendments to Regulation D, Form D, and Rule 156 to the Securities Act.

The senators said general solicitation materials that contain risk disclosures should be filed with the SEC because it will give federal and state regulators a better understanding of the market’s landscape and will deter misleading advertisements. They said mutual funds, which are considered less risky, are required to submit advertising materials for review and are required to include specific risk disclosures in their advertisements.

“Form D is an important tool for federal and state securities regulators to be able to track and monitor offerings, and to target surveillance and education efforts appropriately,” the lawmakers wrote. “Without it, a regulator’s first sign of a problematic offering may be a phone call from an investor who faces a lost retirement.”

Currently, businesses don’t have to file Form D until two weeks after an offering has begun.

The SEC is planning to adopt the rules by the end of the year, but the agency’s leadership will have to contend with stiff opposition by businesses and Republican lawmakers who say added requirements will dampen capital raising at a time when the economy and job growth are still sluggish.

At a July hearing, Rep. Scott Garrett, a Republican from New Jersey who chairs the House Financial Services Subcommittee on Capital Markets, criticized the Form D proposal.

“I believe that many of the additional requirements in the SEC’s Reg D proposal will, if ultimately adopted, make Rule 506 a less attractive avenue for small business capital formation,” Garrett said. “This is clearly at odds with the goals, let alone the text, of the JOBS Act.”