General Solicitations Lag, but Little Fraud: SEC

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By Rob Tricchinelli

Oct. 28 — Few issuers are taking advantage of an SEC rule allowing them to widely solicit investors to private placements, although concerns over far-reaching fraudulent behavior haven’t been realized, the head of the Securities and Exchange Commission said Oct. 28.

“Only a small fraction of issuers claimed the new exemption permitting general solicitation,” SEC Chairman Mary Jo White said at a Practising Law Institute seminar on securities regulation in New York.

In July 2013, the SEC adopted a rule lifting the ban on general solicitation of private offerings, provided the securities are sold only to accredited investors.

Ratios

Traditional private offerings can still be made under Rule 506(b) of Regulation D, and they far outpace the general-solicitation offerings under the new Rule 506(c).

The traditional offerings have exceeded the newer ones by a 12 to 1 margin since general solicitations became available, Sebastian Gomez Abero, head of the SEC’s Office of Small Business Policy in the Division of Corporation Finance, said on a PLI panel later in the day. The dollar amounts for traditional private offerings run to 30 times that of the newly available ones, he added.

“We understand a number of issuers don’t want to engage in a general solicitation, even though [the new rule] permits it,” he said.

“I think a lot of people thought it was going to be utilized more than it has been now,” he told Bloomberg BNA after the panel. “It’s taking a lot of people by surprise.”

Reasons

Other lawyers on the PLI panel weighed the reasons for lagging general solicitations.

Many issuers dealing with large private offerings already have “a ready stable of investors” and the audience for general solicitation hasn't expanded enough yet, David Harms, a partner at Sullivan & Cromwell LLP in New York, said.

There aren't many platforms for reaching them, either, Steven Bochner, a partner at Wilson Sonsini Goodrich & Rosati LLP in Palo Alto, Calif., said. The market is entering a “Cambrian explosion of private-market platforms,” he said, alluding to the relatively short period of time in which complex animal life evolved on earth.

Industry observers have bemoaned the sluggish use of general solicitations almost since the rule was adopted.

“I think if you asked analysts, each one of them would come up with a different reason why” general solicitations haven't been used as much, Gomez told Bloomberg BNA.

Fraud?

When the general solicitation rule was being considered, consumer advocacy groups and state securities regulators warned that investors could face a higher risk of getting suckered by fraudulent dealings.

White said those risks have been unfounded, even though the SEC is studying the area.

“We have some investigations open, primarily focused on companies’ failure to take reasonable steps to verify the status of investors, sales to unaccredited investors, unregistered broker-dealer activity and some instances of possible fraud,” she said. “There has not been to date, however, a demonstration of the widespread fraud that some feared would occur.”

Reg A Plus

In other capital formation initiatives, White said roughly 50 issuers have filed to make a securities offering under Regulation A Plus, which allows companies to publicly raise up to $50 million without incurring higher reporting requirements.

That rule took effect in June, and allows two tiers of offerings. The first tier includes offerings up to $20 million per year, and Tier 2 includes up to $50 million. For offerings up to $20 million, issuers can use either tier, but Tier 2 offerings face extra requirements and state law is preempted—Montana and Massachusetts have sued the agency over the preemption provisions.

Of the 50 issuers, slightly more than half have been in Tier 2, Gomez said.

“The scale is tilting slightly toward real estate type issuers, but pretty much all industries have been represented,” he added.

Mining

The agency will also soon address Regulation S-X, which provides the framework for financial reports, and update its industry guides—including for bank holding companies and mining companies—White said.

The mining company guidance drew scrutiny from mining-state senators in mid-2014, who noted that the guide was “first formulated and published over 30 years ago and has not been updated since”.

The agency is also expected to adopt crowdfunding rules on Oct. 30.

To contact the reporter on this story: Rob Tricchinelli in New York at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com