NSBA Files Comments on Regulation D Proposed Rules

September 25, 2013

pic-money-collageOn Monday, Sept. 23, 2013, NSBA filed comments with the Securities and Exchange Commission (SEC or Commission) regarding proposed amendments to Regulation D, Form D and Rule 156.

NSBA believes that the proposed rule would impose costs that are much too high on small businesses trying to raise capital via Regulation D private placements. NSBA also believes that much of the information collected under the proposed rule will be of little or no practical value to the Commission. The proposed requirements will impose very significant costs on issuers — costs that will consume a significant percentage of the capital raised and make those funds unavailable for productive purposes.  The proposed rule will harm economic growth, job creation and economic efficiency.  Moreover, there is little reason to believe it will materially improve investor protection.

The proposed rule would replace one regulatory filing with three. Under the proposal, on one Form D, companies taking advantage of general solicitation as permitted by the JOBS Act would be required to file an advance Form D, a Form D and a closing Form D.  Thus, the costs of complying with Regulation D would increase dramatically.  It is entirely unclear what the investing public gains from this substantial increase in regulatory costs.

The Commission is proposing to add new Rule 509 to require all issuers to include certain legends in any written general solicitation materials used in a Rule 506(c) offering.

Requiring a legend to the effect that the offering is available only to accredited investors is not extremely burdensome and will probably be done by issuers most of the time even in the absence of a rule requiring it.  Issuers are not going to want to have to field a large number of inquiries from non-accredited investors that cannot invest in their offering.  Nevertheless, it is the statutory verification requirement that will be effective in reducing the incidence of non-accredited investors participating in Rule 506(c) offerings, not a legend.

Other legends, other than those already required, are unnecessary in our judgment.

The proposed amendments do not specify the precise wording of any required legends. If the Commission adopts a legend requirement, NSBA recommended that the SEC set forth specific language that it believes would satisfy the requirement.  This would eliminate uncertainty and regulatory risk and would impose no additional costs.

The Commission is proposing new Rule 510T to require that an issuer conducting an offering in reliance on Rule 506(c) submit to the Commission any written general solicitation materials prepared by the issuer and used in connection with the Rule 506(c) offering. Under the proposed rule, the written general solicitation materials must be submitted no later than the date of first use of such materials in the offering. This temporary rule would expire two years after its effective date.

This would constitute a significant administrative burden on issuers.  As materials are developed and used, many filings may be required even if the materials differ only slightly.  But more importantly, it is entirely unclear what the Commission will do with the many thousands of documents (advertisements, web pages, flyers, letters, etc.) it will receive under this proposed rule.  It will not provide information susceptible to much, if any, meaningful and useful summary or quantification.  It is not clear how the information would lead to a better understanding of what enforcement or regulatory changes should be undertaken.  Investors will be not be helped in the slightest in that they are going to receive these materials directly from issuers. Filing the materials with the SEC provides no additional information to investors.  It is, however, clear that once again it will increase costs and make general solicitation offerings less attractive.

Smaller issuers should be exempted from this requirement.

NSBA also expressed strong opposition to raising the current accredited investor income or net worth requirements.

To read the NSBA Comments, click here.