SEC’s Investor Advocate Submits Inaugural Report to Congress

The Securities and Exchange Commission’s Investor Advocate, a position created by the Dodd-Frank Act to report and advise on the work of the Commission and self-regulatory groups in response to investor concerns, recently submitted its inaugural report to Congress. In the report, the Investor Advocate, Rick Flemming — previously counsel for the North American Securities Administrator Association — touched on recommendations to the SEC on the issues of Title III of the JOBS Act (the equity crowdfunding law) as well as Title II of the Act (general solicitation under Rule 506(c)). In regards to equity crowdfunding, the IA made six recommendations that included: – Adopting tighter limits on the amount that investors can invest in equity crowdfunding – Strengthening the mechanisms to monitor and enforce the above investment limits – Affirming, clarifying, and strengthening the obligations of crowdfunding intermediaries, including conducting background checks, “curating” offerings; in addition, considering a tiered regulatory structure based on size of offering, investment limits, and participation by “bad actors” – Improving effectiveness of educational materials for investors – Amending the proposed definition of “electronic delivery” to also require, at a minimum, disclosure of a specific URL where offering disclosures can be found – Replace the proposal to eliminate application of the integration doctrine with a narrower approach The IA’s report also reiterated seven proposals previously made to the SEC in regards to Rule 506(c) general solicitation: – Require issuers who use general solicitation to file a new or revised Form D – Require all solicitation materials be provided to the SEC – Adopt safe harbors for verification of accredited investor status, and promote reliance on third parties for verification – Make filing of Form D a condition of the exemption, while minimizing penalties for small, unsophisticated issuers – Ensure performance claims in solicitation materials are based upon appropriate performance reporting standards – Amend the definition of accredited investor for natural persons to better reflect the population that has the sophisticated knowledge and/or financial resources to analyze and withstand the risks of loss – Disqualify “bad actors” from using Rule 506 The SEC has already on acted on several of these proposals, including the disqualification of bad actors, as well as the promulgation of safe harbors for accredited investor verification in its adopted Rule 506(c). The remainder of the IA’s recommendations were incorporated into a proposed follow-on rule for general solicitation that has gone through two public comment periods in which the SEC received some backlash, but which the SEC has yet to officially adopt.

Leave a Reply

Your email address will not be published. Required fields are marked *