Wednesday, November 7, 2012

JOBS Act Double-Take

By Tim Husson, PhD

Senator Carl Levin (D-MI) and colleagues have written two letters (available in PDF format here and here) to the SEC "to express [Congress's] concerns with, and offer improvements to, the Commission's Proposed Rule to implement Section 201 of the Jumpstart Our Business Startups Act (the JOBS Act)."  Basically, the Senators argue that the SEC has misinterpreted the JOBS Act as allowing for widespread solicitation for private placement investments, when apparently Congress had no such intent.  From the second letter:
In addition, the Proposed Rule appears to misconstrue Section 201 as a mandate to remove any and all regulation of such general solicitation. However, the statute and legislative history reflect the intent to only remove the prohibition on general solicitation.  Congress could have removed from the Commission any authority to condition, limit, or otherwise regulate the manner or substance of general solicitation. Instead, Congress clearly elected to allow the Commission to retain its authority to regulate this new allowance for general solicitation in offerings exempt from registration pursuant to Rule 506 or Rule 144A. As such, we believe that the Proposed Rule should be significantly revised to provide clear, objective, and meaningful regulation of the manner and substance of general solicitations that may be allowed in private offerings.
They are apparently arguing that because the SEC was not expressly prohibited from regulating private placements, it was in fact required to do so.  They add that:
In providing a solid regulatory framework within which to permit general solicitation regarding certain private offerings, the Commission should distinguish between issuers that engage in operational businesses and those that are merely investment vehicles.
While the point of view expressed by the Levin letters makes sense from an investor protection standpoint, it is difficult to find evidence for that interpretation in the language of the Act itself (see section 201), so it is hard to blame the SEC for proposing the rule changes that it has.  That said, if the door is now open for the SEC to implement more stringent protections against the kind of abuses people are concerned about, that could be a huge win for investors.  As we've been discussing lately, these provisions could be a shot in the arm to all sorts of unsuitable or fraudulent investments.

But the Senators' letters do not offer a great deal more guidance than the original legislation.  Apparently it is still quite unclear how the government will come down on this issue, even though the clock has already run down on the SEC's 90-day window to implement the changes.  Whatever the final result, it is sure to have a very significant impact on retail investors--a fact appreciated by Senator Levin, who notes:
Section 201 removes the long-standing ban on general solicitation and advertising in some so-called "private" offerings. Yet, because the total dollars raised by these types of offerings now exceeds the dollars raised through registered offerings, how the Commission implements the changes to such offerings in Section 201 is critically important.
Indeed.

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