On October 15, the Investor Advisory Committee (IAC) established by Section 911 of the Dodd-Frank Act released its recommendations to the SEC on the proposed general solicitation rule. This is the first of several posts over the next few days that will examine some of the comment letters the SEC has received in response to proposed Rule 506(c).
According to its website, the purpose of the IAC is “to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the Commission.”
In brief, here are the recommendations of the IAC:
- As a precondition for claiming the new general solicitation exemption, issuers should be required to file a new “Form GS” or a revised version of Form D that would include data relating to control persons, the identity of the issuer’s accountants and legal counsel, a description of the business and proposed use of proceeds, and a description of the issuer’s plans with respect to general solicitation.
- Copies of all materials used in the general solicitation should be provided to the SEC either before or shortly following the first sale.
- The SEC should provide clear and enforceable safe harbors for verifying accredited investor status, including safe harbors relating to the use of third parties for verification, to replace the facts and circumstances “reasonable steps” standard that the SEC has proposed.
- Filing Form D should be a condition for relying on the Regulation D exemption (currently Form D is required to be filed, but it is not actually a condition to the exemption).
- The SEC should take steps to ensure that any performance claims used in general solicitation materials “are based on a clear, well-defined, and auditable standard.”
- The SEC should revise the natural person prong of the accredited investor definition to better align the definition with persons who have the financial sophistication to analyze private offerings and/or sufficient wealth to withstand losses. The IAC acknowledges that the SEC is prohibited from adjusting the net worth portion of the definition until 2014, but asserts that other revisions to the accredited investor definition are possible now.
- The SEC should adopt the “bad actors” rule that was proposed in May 2011 pursuant to Section 926 of the Dodd-Frank Act. The IAC feels that all rules relating to offerings using general solicitation should take effect at the same time, including the proposed rule that would disqualify bad actors from taking advantage of the general solicitation exemption.
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