SEC Advisory Committee Weighs in on General Solicitation Rules

In its first official recommendation, the Securities and Exchange Commission’s Investor Advisory Committee called for investor safeguards to be incorporated into a set of rules for the general solicitation and advertising of private offerings.

The JOBS Act, enacted last spring, directed the SEC to approve the use of mass marketing methods in private offerings. When the Commission came out with its draft rules at the end of August, Americans for Financial Reform and the Consumer Federation of America issued a joint statement deploring the absence of investor protections. Now the SEC’s Investor Advisory Committee has made the same point, laying out several specific remedies.

Under the committee’s recommendations, companies would have to outline their marketing plans in advance and take specific steps to verify that they are dealing with investors sophisticated enough to understand the risk and secure enough to afford it. The advisory committee also urged the SEC to post all solicitation materials in an online “drop box,” as a way of “‘crowdsourcing’ the public’s ability to inform the Commission of potential fraud.”

The advisory committee, established by the Dodd-Frank Act, includes representatives of hedge funds, private equity funds, and pension funds, as well as of the AFL-CIO, the AARP, and the Consumer Federation of America, among other groups. Its 21 members came out unanimously in favor of the recommendations.

The SEC, facing pressure from some JOBS Act supporters, had originally planned to expedite its rulemaking procedure. After protests from AFR, CFA, and others, chairman Mary Schapiro agreed to follow the standard practice of putting out a draft rule and allowing for public comment. Now that the Commission has received an outpouring of comments calling for stronger investor safeguards – including the comments of its own Investor Advisory Committee – maybe the Commission will decide to take these concerns seriously.

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