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US Securities and Exchange Commission

State Securities Regulators Ask Congress for Private Market Reforms, SEC Rulemaking Pause

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Bill Flook

The president of the North American Securities Administrators Association (NASAA) on May 26, 2020, urged lawmakers to mandate greater transparency in the private securities marketplace and require the SEC to pause all of its rulemakings not related to the COVID-19 crisis.

“As a result of the transparency that is a hallmark of our the public markets, we have a clear understanding of how these markets have functioned during the pandemic,” NASAA President Christopher Gerald said during a virtual roundtable with the House Financial Services Committee. “The same cannot be said for the private markets.”

He pointed to the nearly $3 trillion raised through exempt offerings in 2018, which surpasses the public markets, “yet we know very little about how these markets function.”

NASAA especially wants Congress to put in place reforms to the exemptions contained within Rule 506 of Regulation D under the Securities Act of 1933.

In a set of legislative recommendations meant to aid in the response to the novel coronavirus pandemic, the organization of state and provincial securities regulators is urging Congress to expand regulatory review of Rule 506 offerings in its fourth COVID-19 relief package.

“Fraudulent private securities offerings, e.g. Rule 506-like exemptions, are being pitched to retail investors,” NASAA stated in its recommendations. “Indeed, opportunists are already known to be exploiting the COVID-19 pandemic and market turmoil, including the current volatility of the public securities markets to promote public and private offerings related to COVID-19.”

In calling for private marketplace reforms, the group cited the limited data provided in private securities transactions that hampers oversight and policy-making; late Form D filings; cold calls to retail investors, social media posts, and other violations of general solicitation requirements; and the failure to verify an investor’s accreditation prior to accepting money.

Today, an issuer must file a Form D within 15 days of the first sale of securities. And while failing to file can come with some consequences, it does not result in an issuer losing access to the exemption under Reg D.

Gerald, in his remarks to the House panel, warned that “despite the fact that the economy has changed profoundly since then, the SEC so far appears intent on proceeding with a deregulatory agenda, as if little has changed.”

“This should concern the committee,” Gerald said, calling for a broad pause in non-COVID-19 rulemaking at the commission.

The SEC in March issued a proposal in Release No. 33-10763Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, to streamline the current exemption framework. The proposal would raise dollar ceilings for certain offerings permitted under Regulation AReg D, and Regulation Crowdfunding (CF), all of which carry different requirements for accounting, investor accreditation, and disclosure. (See SEC Proposes Broad Reforms for Exempt Offerings, Commissioner Lee Dissents Citing Erosion of Investor Protection in the March 6, 2020, edition of Accounting & Compliance Alert.)

SEC Chairman Jay Clayton, in remarks prior to the March vote on Release No. 33-10763, said the proposals “would rationalize an overly complex, patchwork regulatory framework and thereby promote capital formation while preserving or enhancing important investor protections.”

The proposal follows an SEC concept release issued in June 2019 in Release No. 33-10649Concept Release on Harmonization of Securities Offering Exemptions.


This article originally appeared in the June 01, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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