The Most Important Thing You Need To Know Now About The Lifting Of The General Solicitation Ban

I’m tempted to begin this post with the following:

Last week, the Securities and Exchange Commission lifted the ban on general solicitation in Rule 506 and Rule 144A offerings.

The problem with that sentence is that it simply isn’t true.  The SEC did not lift the ban – Congress lifted the ban over a year ago when it enacted Section 201(a) of the Jumpstart Our Business Startups (JOBS) Act.

Pray, how long will the SEC try Congress’ patience?

And yet, the ban hasn’t been lifted – at least not yet.  The SEC’s rule takes effect 60 days after publication of the final rule in the Federal Register.  Given the fact that the SEC has been in violation of the law for more than a year, I find this delay to be extraordinary.  While it is true that under the Administrative Procedure Act (5 U.S.C. § 553) rules generally become effective 30 (not 60 days) after publication, an agency may invoke “good cause” to have a rule take effect earlier.  There is ample good cause here in light of the fact that Congress ordered the SEC to adopt the rule changes by July 4 of last year.  Remarkably, the SEC missed Congress’ deadline by more than a year (to be more exact, 371 days, 8,904 hours, 534,240 minutes, or 32,054,400 seconds).

In my comments last fall, I urged that the SEC adopt its rule changes retroactively:

As pointed out by Justice Antonin Scalia, retroactivity can be an appropriate means for giving effect to Congressional intent when an agency misses a statutory deadline: “If, for example, a statute prescribes a deadline by which particular rules must be in effect, and if the agency misses that deadline, the statute may be interpreted to authorize a reasonable retroactive rule despite the limitation of the APA Administrative Procedure Act.” Bowen v. Georgetown Univ. Hospital, 488 U.S. 204, 25 (1988)(concurring opinion). Following Bowen, the D.C. Circuit Court of Appeals has treated Justice Scalia’s concurring opinion as substantially authoritative . . . . Nat’l Petrochemical Refiners Ass’n v. EPA, 630 F.3d 145, 163 (2010).

Failure to revise Rule 506 retroactively would be both arbitrary and capricious in light of Congress’ express deadline.

In the adopting release, the SEC ignored this comment.  Under the federal APA, agencies are required to provide reasoned responses to all significant comments.  In the words of Judge Leventhal, this requires that ”comments must be significant enough to step over a threshold requirement of materiality before any lack of agency response or consideration becomes of concern,”Portland Cement Ass’n v. Ruckelshaus, 486 F.2d 375, 394 (D.C.Cir.1973).  Given the unambiguous mandate of Congress and judicial precedent approving of retroactive rule making, my comment clearly crossed the threshold of materiality and should have been addressed by the SEC.  Had the SEC addressed my comment, it not only would have avoided a violation of the APA’s rule making requirements, it would have substantially ameliorated many of the “grandfathering” issues discussed in the adopting release.