Shifting sands

Delays in implementing US regulations aren’t anything out of the ordinary, but it’s rare when one of the reasons for the delay is so publicly disclosed – and publicly criticized. 

In November, the announcement that US Securities and Exchange Commission (SEC) Chairman Mary Schapiro was due to step down the following month coincided with the revelation that she intentionally had postponed the implementation of Section 201(a) under the Jumpstart Our Business Startups (JOBS) Act, which would repeal the prohibition on general solicitation and general advertising for private offerings.

According to a November 30 letter sent to Schapiro from Patrick McHenry, chairman of the House of Representatives subcommittee responsible for overseeing the implementation of the JOBS Act provision, the SEC’s Division of Corporation Finance was preparing to release an interim final rule, which would have ended the ban immediately, at the commission’s meeting on August 22, 2012. The commission already had missed the original July 4 deadline to amend Regulation D, as stipulated by the JOBS Act when it was enacted in April.

In early August, however, an email from a lobbyist expressing strong objections to the interim final rule led Schapiro to change her mind, revealing in an email to SEC Director Meredith Cross that “I don’t want to be tagged with an anti-investor legacy.” Rather than issuing an interim final rule on August 29, the SEC instead released proposed regulations with a 30-day comment period. 

Schapiro’s decision drew the ire of fellow SEC Commissioner Daniel Gallagher, who responded with an email bearing the subject header of “I am furious.” In his message, he wrote: “I continue to find shifting sands. A ‘proposal’ on general solicitation could have been done months ago and indeed should have been done years ago.”

Elizabeth Shea Fries, a partner at law firm Goodwin Procter, sympathizes with the SEC’s conundrum. “To be fair to the commission, this is a hard issue,” she says. After all, the ability to advertise in a newspaper or through direct mail increases the opportunities for people to be defrauded. “On the one hand, you’re trying to balance the need to raise capital to support businesses and, on the other, the need to make sure fraudsters don’t have an easier time of it,” she adds. 

Nonetheless, the sands indeed continue to shift. Since the public comment period ended on October 5, SEC staff has continued to analyze the comments and consider a recommendation to the commission. No timeline has been set in terms of issuing final regulations, despite the urging of McHenry and other legislators for the SEC to do so prior to Schapiro’s departure.

Schapiro’s exit, meanwhile, has brought additional uncertainty to the future of the proposed rule. Elisse Walter, who has served as an SEC commissioner since 2008, has replaced Schapiro as chairman, but the empty seat has yet to be filled. A fifth member is crucial to the commission, which currently is composed of two Republicans and two Democrats that reportedly are at loggerheads over the general solicitation ban.

As it currently stands, the proposed rules allow firms to use general solicitation or general advertising in their offerings, provided that they “take reasonable steps” to verify that investors in the offering are accredited investors. However, the SEC does not specify what those steps should be, instead allowing firms some flexibility with how they verify a purchaser’s accredited investor status. The rules also would amend Form D to add a separate box for issuers to check if they are claiming the new exemption that would permit general solicitation and general advertising.

The proposed rules still lack many specifics, however, so it remains to be seen how freely firms will be able to solicit or advertise in the future. “Even though Congress mandated the repeal of the ban on general solicitation, the regulators still have authority to regulate what is said,” says Fries. The exact scope of what can be said in solicitations is subject to general anti-fraud rules and more specific advertising rules that apply to registered investment advisers, as well as other restrictions. 

“I’d expect that, under new leadership, the SEC will proceed with the proposed rules,” Fries adds. “However, we also may end up with either additional rules affecting advertising by regulated entities or a change in the nature and extent of enforcement activity in the space, which could have a chilling effect.”