WASHINGTON Two U.S. securities regulators on Thursday said more safeguards for investors should be considered before a rule lifting the ban on general advertising for private offerings is adopted, with one going so far as to call for a complete re-write of the proposal.
Luis Aguilar and Elisse Walter, both Democratic members of the Securities and Exchange Commission, said the agency needs to seriously consider whether allowing broader advertising could unduly harm investors unless additional steps are taken.
In an interview with Reuters, Aguilar said he wants to scrap the proposal altogether and start from scratch.
Walter did not go so far as to call for a new version of the rule. But in remarks at the SEC's Forum on Small Business Capital Formation, she said the SEC must tread carefully before simply lifting the ban.
"I think everyone can agree that removing the ban on general solicitation, essentially allowing public offers in private security transactions, is a fundamental change in the securities market," Walter said.
"We must be vigilant about the potential consequences, particularly unintended consequences of a significant change like this, and consider ways to mitigate potential harms to the investors while preserving the rule's intended benefits."
The SEC's proposal would greatly loosen strict advertising rules to make it easier for hedge funds, private equity funds and other firms to raise capital in the private market.
The proposal pertains to several kinds of offerings, including those made under what is known as "Rule 506" of Regulation D, which allows companies to raise an unlimited dollar amount from accredited investors who meet certain income or asset thresholds.
The rule is mandated by the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill signed into law earlier this year that eases securities regulations to help spur small-business growth and capital formation.
The SEC has already missed a congressional deadline to implement the rule. In August, it released a proposal for public comment, with Aguilar dissenting on concerns it failed to include even basic investor protections.
Since then, consumer and investor advocacy organizations, as well as state securities regulators, have widely criticized the draft, saying it would open the floodgates for fraud.
They said the draft failed to even contemplate some of the basic protections they had proposed to the SEC prior to its release, such as amending the definition of "accredited investor" to make sure unsophisticated people are not captured and tweaking the filing rules so the commission can collect data on solicitation practices to help it police the marketplace.
In a call with reporters in October, they urged that the rule include these additions.
In her remarks at Thursday's small-business event, Walter cited the groups' ideas as things that the SEC should contemplate as the rulemaking process continues.
If the SEC does decide to incorporate them, however, then arguably the agency might have to re-propose the rule.
That is because the law governing federal rulemaking requires agencies to re-propose a rule if the final rule will contain significant changes from the proposed version. (Reporting By Sarah N. Lynch; Editing by Steve Orlofsky)