SEC Chair Mary Jo White Sheds Light on JOBS Act Rulemaking

Mary Jo WhiteIn an Q&A session with Steven Bochner of the Securities Regulation Insitute, SEC Mary Jo White shared some insight into the rule-making process surrounding the JOBS Act and the various investment crowdfunding regulations enacted by the SEC.

In listing the agencies accomplishments under her guidance, the JOBS Act was high on the list. The legislation became law in 2012 but rulemaking was only finished recently with Title III retail crowdfunding becoming actionable this coming May.

In commenting directly on Reg A+ and particularly the ability to generally solicit (advertise) securities offers, White stated;

“Yes. It’s a big landscape, obviously changing recently and fairly rapidly. I think it’s an exciting landscape, that does present real new opportunities for capital raising and flexibility for issuers. It also, puts in very stark relief for the SEC and others to make certain that investors are optimally protected in those markets…”

Regarding the potential for fraud and any ongoing investigations regarding fraud, Chair White stated;

“…for example, general solicitation, the ban on general solicitation for Rule 506(c) was lifted and effective September 2013. So rather than to wait two years or so and say, how has it worked and somebody just gave us a tip on this fraudulent activity. Again, as you know and may well remember from — particularly when we adopted — lifted the ban on general solicitation mandate — as mandated by the JOBS Act, there was a lot of concern about whether there would be pervasive fraud because of permitting general solicitation, even though one could sell only to accredited investors, and so part of the purpose was how’s the market working, how might we adjust it to make it work better, more efficiently, and also be right on top of any fraud that might be occurring.”

 

“What we’ve seen in that — and, again, it’s too early to make any real judgments on that, but on the fraud/misconduct front, we do have some open investigations in several categories. One is actually in the area that is regulated, which is the reasonable efforts that issuers have to make to determine that who they’re selling to are accredited investors and either just not doing it at all or doing a job that clearly doesn’t pass muster. There are certainly, as you have in any market, some instances of fraud, but what we don’t see yet and hope we don’t, is evidence of rampant fraud in that market, obviously something we have to stay very vigilant about.”

SEC Securities and Exchange CommissionWhite is of the opinion that Title II accredited crowdfunding (506(c)) is not being used as much as some expected. She placed the total number of the 506(c) market at $71 billion for a private placement market of about $2.8 trillion. She did say the size of the 506(c) offers are getting larger in size.

Chair White recognized the obvious blurring of lines between public and private. Something that demands a lot of “vigilance”.

Regarding the current definition of an Accredited Investor, Chair White believes it is time to update the rules. She is of the opinion that “net worth and income criteria” are not the best proxy for who can fend for themselves in the market.

“There are number of alternatives that are discussed in that study that are being considered as, again, proxies for sophistication and being able to fend for yourself depending on your background, your professional qualifications, how much you have been involved in investing. I think investment limits is a very interesting concept in this space, obviously being used in A+ and crowdfunding, but I think ultimately it will result in a rulemaking.”

The SEC staff has recently forwarded suggested updates to the definition that may take a more holistic approach instead of a hard line economic hurdle.

Regarding secondary markets, a hot topic for securities issued under updated exemptions, Chair White stated;

“Secondary liquidity for investors on the private side is something that our advisory committees, the Commission, lots of folks are attending to. Technology has made it possible to bring buyers and sellers together on various kinds of alternative trading platforms. We’re looking at — there have been venture exchanges before as a means of increasing secondary liquidity. They haven’t yet worked that well.”

“I think in general [there are] a couple things going on there. One is I think the marketplace has not yet found the solution or the optimal solutions for providing enough secondary liquidity — on the private side. I think we still need to work at it. One of the things we’re doing at the Commission is we want to modernize our rules so that we’re not presenting obstacles. If you think we are, we want to hear about that. For the most part, I think our rules have quite a bit of flexibility and certainly we are receptive and are talking all the time to market participants about new proposals and ways to increase liquidity.”

Washington D.C.The SEC has seen renewed vigor in accomplishing its statutory tasks in contrast to some of Chair White’s predecessors. Interestingly White deferred on sharing her expectations of Washington, DC and the inside the beltway theater but did reveal;

“It’s met my expectations. I think I’ll leave it at that.”



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