Revealed! The Investor Advisory Committee’s Recommendations On Lifting The General Solicitation Ban In Rule 506 Offerings

I was not the only one who was perturbed by the Investor Advisory Committee’s procedures for considering the Securities and Exchange Commission’s proposed rulemaking to lift the ban on general solicitation and Advertising in Rule 506 offerings.  Niels Holch, the Executive Director of the Coalition of Mutual Fund Investors, submitted this comment letter that concludes:

If there is little interaction with retail and other investors not on the Committee, I question whether this Advisory Committee is really fulfilling its mission representing investor interests.

Indeed!  The Investor Advisory Committee’s operations are intolerably, but not irremediably, flawed.  In an earlier comment letter, I made a number of recommendations, all of which appear to have been ignored:

The Committee’s governing documents should be amended to provide that interested persons are permitted to attend, appear before, or file statements with it.

Although Section 5 of the Committee’s Charter provides that meetings of the Committee are open to the public, neither the Charter nor the Bylaws provide that interested persons are permitted to attend, appear before, or file statements with the Committee.  Specifically, providing these rights will help to ensure that the Committee will have access to a wide range of views and will not be influenced inappropriately by any special interests.

The Committee’s governing documents should clearly provide that all Committee documents are available for public inspection.

Section 12 of the Committee’s Charter provides that the official records of the Committee will be available for public inspection pursuant to the Freedom of Information Act. To insure transparency and accountability, the Charter should specify that the Committee’s official records include the Committee’s records, reports, transcripts, minutes, appendixes, working papers, drafts, studies, agenda and other documents that were made available to, prepared for, or by the Committee.

The required vote should be amended to specify that action by the Committee requires the affirmative vote of a majority of the Committee members.

Section F of the Committee’s Bylaws provides that action may be taken by a simple majority of the votes cast at a meeting at which there is a quorum.  This is too low a voting threshold.  Currently, there are 21 members of the Committee.  Pursuant to Section H of the Bylaws, a quorum would consist of 11 members.  Assuming that 11 members are present at a meeting, action could be taken by as few as 1 member (assuming that the other 10 abstain).  Even in the more likely scenario of 11 members voting, action could be taken by less than 30% of the total membership of the Committee (i.e., 6 members).  Imposing a higher vote requirement would help to assure that the Committee is not inappropriately influenced by special interests and that its advice and recommendations have the imprimatur of a true majority of the Committee members.

Surprise!

Now, we are beginning to see the Committee’s work product, which I believe many will find surprising, if not shocking. 

The Committee is proposing that the filing of a Form D be made a condition to the availability of the Regulation D exemption.  This proposal does not appear to be limited to offerings involving a general solicitation pursuant to Rule 506.  Thus, it would impose a new burden on all offerings pursuant to Regulation D.  As I’ve pointed out in the past, Form D has suffered from “mission creep” (See “Is Form D Afflicted With Mission Creep?“) but the Committee is proposing much more than evolutionary change.  This would be revolutionary – and costly.

The Committee is also proposing that “all solicitation material prepared or disseminated by or on behalf on the issuer that is being disseminated to the public through a general solicitation or advertising campaign in reliance on the new exemption be furnished to the Commission” (emphasis added).  The Committee is further recommending that this information be made available for prompt public view.  This recommendation overlooks the reality that while some issuers may engage in a public solicitation for potential investors, they nevertheless have legitimate reasons to limit dissemination of certain disclosures.  For example, an offering document may include trade secrets or other proprietary information.  Although the Committee is recommending a simple on-line “drop box” at the SEC, I doubt its assertion that this recommendation could be implemented at “a very low cost”.  It certainly would require a significant effort on the part of the Commission to define what must be filed and when.  I also expect that imposing a new furnishing requirement will impose significant compliance costs on issuers relying on Rule 506.

It is truly unfortunate that the Committee kept these recommendations in the dark and only revealed them after the Committee had met last Friday.