Washington D.C. — Regardless of what you think of the JOBS Act provision lifting the ban on general solicitation and advertising in private offerings – whether you think it is a long-overdue updating of a regulation that is unnecessarily inhibiting the flow of capital to small start-up companies or a reckless relaxation of a regulation that is necessary to prevent fraud and protect the integrity of the capital formation process – most of us can agree that lifting the solicitation and advertising ban fundamentally changes the nature of these offerings.

Clearly, CFA falls into the camp of JOBS Act skeptics.  We have made no secret of the fact that we believe it is a fundamentally flawed bill.  But you shouldn’t have to be a JOBS Act skeptic to believe that a change of this magnitude should be approached cautiously and thoughtfully to ensure that it doesn’t do more harm than good.  After all, as the SEC itself has acknowledged, the risks here are very real:

• risks that lifting the solicitation ban will lead to an upsurge in fraud;
• risks that investors will be misled;
• risks that offerings will be sold to investors who don’t fully understand those risks or can’t afford the potential losses;
• risks that issuers will find it more difficult to raise capital in a market tainted by fraud.

The question, then, is why the Commission has proposed a rule that doesn’t even consider how those risks might be addressed, let alone propose anything concrete to address them.

• It isn’t that the Commission lacks the authority.

While the JOBS Act requires the Commission to lift the solicitation ban, it doesn’t in any way limit the Commission’s authority or its responsibility to adopt appropriate safeguards to protect investors and the integrity of the capital formation process.

• It isn’t that there’s a shortage of ideas.

Many commenters, including all of us on this call, had submitted concrete, practical proposals to strengthen the rule’s investor safeguards before the Commission ever issued its rule proposal.  These range from the simple – require Form D to be filed in advance as a condition of relying on the exemption and use the form to collect information about solicitation practices – to the more complex – amend the definition of accredited investor to ensure that it better defines a population of investors who are able to fend for themselves without the regulatory protections afforded by public offerings, or adopt regulations governing the content of solicitation and advertising materials, particularly with regard to performance claims by hedge funds and private equity funds.

• It isn’t that the Commission didn’t have time.

It is true that Congress put the SEC on a ridiculously tight schedule for completing JOBS Act rules, and it is already getting heat from some members of Congress for falling behind schedule.  While we recognize that this may make life uncomfortable for the SEC, an agency that is more than a year past the statutory deadline for many Dodd-Frank Act rulemakings can’t convincingly argue that congressional deadlines are sacrosanct.  Nor can it argue, in our view, that JOBS Act implementation should take priority over Dodd-Frank implementation, given the relative gravity of the issues the two laws address.

• And, finally, it isn’t that the costs of these added investor protections would outweigh their benefits.

If they did, how would the Commission know?  After all, the Commission didn’t bother to conduct a meaningful, or even a cursory, economic analysis of the proposed rule.  Among its many failings in conducting this analysis, the Commission completely ignored its own recently published guidelines for economic analysis which require it to consider reasonable alternative regulatory approaches.  And it hasn’t offered any explanation to justify that decision.

Let me be clear.  We are not big fans of cost-benefit analysis.  We think it is inherently biased to give greater weight to concerns about costs to business than it gives to concerns about harm to investors for the simple reason that costs to business are easier to measure.  Given the Commission’s investor protection mission, the least we ought to have a right to expect is that the Commission will show at least as much care in analyzing potential harms to investors of rule proposals to roll back investor protections as it does in analyzing costs to business of rule proposals to strengthen investor protections.  This rule proposal fails to meet that test.  If the Commission persists in adopting such a blatant double standard when it comes to economic analysis it will deal a fatal blow to its effectiveness and credibility as an investor protection agency.

The Commission stated in its proposing release: “Preserving the integrity of the Rule 506 market and reducing the incidence of fraud would benefit investors by giving them greater assurance that they are investing in legitimate issuers. In turn, issuers would also benefit from measures that improve the integrity and reputation of the Rule 506 market because they would be able to attract more investors and capital.”  We agree.  That is why we were so disappointed that the Commission chose to propose a rule that is completely devoid of appropriate investor protections.  And that is why we believe the Commission has no choice but to withdraw this clearly deficient rule and issue a new rule proposal – one that incorporates reasonable safeguards, promotes capital formation without sacrificing investor protection and provides regulators with the tools they need to police the market.

Contact: Barbara Roper    (719) 543-9468

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The Consumer Federation of America is a nonprofit association of nearly 300 consumer groups that was established in 1968 to advance the consumer interest through research, advocacy, and education.