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Home > Blog > State Regulators Up in Arms Over SEC’s Regulation D Proposal

State Regulators Up in Arms Over SEC’s Regulation D Proposal

State securities regulators had harsh words for the Securities and Exchange Commission (SEC) earlier this week over a proposal that would end advertising restrictions on private placements.

Private placements have been at the center of scrutiny by regulators following the debacle involving Medical Capital Securities and Provident Royalties. Both entities were charged with securities fraud by the SEC in July 2009. Both deals, which the SEC has called Ponzi schemes, cost investors dearly: $1 billion in the case of Medical Capital and more than $485 million for Provident Royalties.

The SEC’s new proposal would essentially open the door to general solicitation for private securities issued under Rule 506 of SEC Regulation D. The change is mandated under the Jump-start Our Business Startups Act.

“Overall, we are greatly disappointed in the proposed amendment to Rule 506,” the North American Securities Administrators Association stated in a comment letter, according to an Oct. 3 article by Investment News.

“It fails to give sufficient guidance to issuers, even though that type of guidance is mandated by the JOBS Act, and it fails to implement any protections for investors, even those that would be minimally burdensome to issuers,” the NASAA letter went on to read. “In short, the commission has neglected its duty to both issuers and investors.”

Rule 506 is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using Rule 506 exemption can raise an unlimited amount of money from accredited investors. Currently, the rules do not allow general solicitation or advertising of private offerings. 

State regulators argue that without the advertising prohibition, additional investor protections are needed, such as stricter verification mechanisms to ensure only accredited investors buy private deals.


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