Representative Patrick McHenry, one of the principal drafters of the JOBS Act, has written a letter to SEC Chair Mary Jo White, ripping the Commission for its proposed regulations lifting the prohibition on general solicitation for certain private securities offerings.
Among its many changes, the JOBS Act required the SEC to lift its ban on "general solicitation" for private securities offerings under Regulation D. (Regulation D is one of several ways that private companies may sell securities to investors without having to register those securities with the SEC.) While lifting the ban on general solicitation was thought to make sense in the context of crowdfunding (an innovation that was also made possible by the JOBS Act) it also reflected the market reality that Web-enabled communication is simply too fast, too transparent, and too fluid to remain subject to the pre-Internet ban on solicitations required by Regulation D.
In its proposed rules to lift the ban on general solicitations, however, the SEC actually imposed new duties on private issuers of securities under Regulation D. In essence, the proposed rules (which are still open for comment) give issuers the choice between a private offering in which general solicitations are still prohibited (now covered by Rule 506(b) of Regulation D) and those in which general solicitations would be permitted (to be covered by newly-proposed Rule 506(c)).
Representative McHenry especially takes issue with the SEC's proposed new Rule 510T which would require any issuer relying on Rule 506(c) to file with the Commission any general solicitation materials that it proposes to send to potential investors prior to sending them. McHenry writes:
"[T]he proposed Rule 510T will require that for the first two years during which the proposed rule is in place, issuers must provide the Commission with all advertisements by the date of first use. Problems clearly exist with the imposition of thise same-day or virtually "real-time" compliance requirement on an enormous market of small issuers that, prior to public advertising, have already raised nearly one trillion dollars per year."
Indeed, given the number of private offerings that take place at any given time, and the potential volume of communications that private issuers might have with the public if the ban on general solicitations were lifted, it is hard to imagine what the SEC would do with the volume of submissions it would receive.