Posted On: October 27, 2012 by Shepherd Smith Edwards & Kantas LTD LLP

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Are Likely

Officials representing consumers, union, and state groups are threatening legal proceedings should the Securities and Exchange Commission’s proposed Rule 506 of the Jumpstart Our Business Startups Act becomes final. They strongly opposed the proposed rule, which is supposed to implement the JOBS Act’s Section 201, which takes away the bars on general solicitations and general advertising for securities offerings that are exempt from registration, per Regulation D’s Rule 506, as long as certain provisions are satisfied. The group officials say that they considered the proposal so flawed that they want the SEC to withdraw the rule, amend it, and propose it again.

Proposed rule 506 gives a safe harbor for Section 4(2) of the Securities Act of 1933’s private offering exemption. Companies that avail of the exemption can raise an unlimited sum of investor funds as long as they are in compliance with certain provisions. However, the groups’ officials don’t believe that the proposed rule gets specific enough about the reasonable steps that issuers must execute to make sure that only accredited investors are the ones that buy the issued securities. They also don’t think that it protect investors enough from the greater fraud risk related to the implementation of the law. (For example, they want private funds to be subject to more restrictions when it comes to seeking capital and advertising to the public.) The group leaders also said that the term “accredited investors” is not defined in a manner that protects the investing public.

Recently, both the SEC and the Commodity Futures Trading Commission had the experience of having the rulemakings they implemented, per the Dodd-Frank Wall Street Reform and Consumer Protection Act, vacated by federal court judges. Questions that were raised included those involving the thoroughness of one rule’s cost benefit analysis and whether an appropriate enough job of comprehending Congressional intent was done when developing regulation. Even the North American Securities Administrators, which considers the SEC to be its partner, would consider a lawsuit against the Commission if proposed Rule 506 were to go through.

However, NASAA President Heath Abshure and others believe it would be a mistake for the Commission to put out an interim or a temporary rule. One reason for this, Consumer Federation of America Investor Protection Director Barbara Roper told reporters last month, is that there doesn’t appear to be an urgent need for the law to be implemented to the point that an interim rule would be necessary should the SEC decide to take time to reassess proposed rule 506. Other groups that oppose Rule 506 of Regulation D include AARP and the American Federal of Labor and Congress of Industrial Organizations.

“It is good to see that state regulators and consumer groups are aware that the SEC seems to be more interested in taking care of Wall Street rather than protecting investors from financial fraud,” said Securities Fraud Lawyer William Shepherd. “After witnessing the catastrophic results of a decade of deregulation in the financial markets, how can we continue down that path?”

JOBS Act (PDF)

Dodd-Frank Wall Street Reform and Consumer Protection (PDF)

Securities Act of 1933 (PDF)


More Blog Posts:
Proposal Getting Rid of Ban Against General Solicitation and Advertising For Certain Private Placements Ended up with Narrower Scope Because of Short Deadline, Said SEC Deputy Director, Stockbroker Fraud Blog, September 20, 2012

SEC Acts to Put into Effect Provision of JOBS Act that Allows General Advertising and Solicitation in Securities Offerings, Stockbroker Fraud Blog, September 4, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012

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