As the Securities and Exchange Commission (SEC) takes up a JOBS Act-required rule to allow the general advertising of unregistered securities, leading investor advocates joined with state securities regulators in calling for the SEC to stand up for investors by including sensible and reasonable safeguards in its rule proposal. On October 9, 2012, NASAA President and Arkansas Securities Commissioner Heath Abshure participated in a news teleconference to discuss the proposed rule with representatives from the AARP, AFL-CIO, Consumer Federation of America and Americans for Financial Reform.  

Heath Abshure
NASAA President, Arkansas Securities Commissioner
October 9, 2012
News Teleconference 

Issue Overview

NASAA members are state-level securities regulators who work closely with small businesses in their capital formation efforts. We want those businesses to be successful so they can thrive and produce jobs.

That said, NASAA members also have the duty to protect investors, and in that role we work frequently with investors who have been victimized by fraudulent or unsuitable private securities offerings.

Based upon our experience, we believe that efforts to spur capital formation cannot be successful unless they reflect a balanced regulatory approach that minimizes unnecessary costs and burdens on small businesses while protecting their investors from fraud and abuse.

This brings us to the JOBS Act and its provision requiring the SEC to amend its Rule 506 to eliminate a ban on the general advertising of private securities offerings.


A little background is in order.  Private offerings give businesses an opportunity to raise capital by selling securities in a limited manner to a relatively small number of investors as opposed to a public offering.  In 1982, the SEC adopted Regulation D, which includes Rule 506 that exempts certain limited securities offerings from registration.

Companies using the Rule 506 exemption can raise an unlimited amount of money without registering the offering with the SEC as long as they meet certain standards. Although the SEC has performed limited reviews of private offerings since 1982, private offerings had been subject to regulatory review by state securities regulators who routinely screened bad actors from raising money through private securities offerings.  This regulatory authority was stripped from the states in 1996 when Congress passed the National Securities Markets Improvement Act (NSMIA). As a result, private offerings receive virtually no regulatory scrutiny.

Since NSMIA became law, the use of the securities exemption found in Rule 506 has been increasingly misused to enable individuals who would otherwise be prohibited from engaging in the securities business to steal millions of dollars from investors.


As the closest regulators to the investing public, state securities regulators see first-hand the dangers investors face when legislation is not implemented in a careful and deliberate fashion.

Rule 506 offerings already are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse.

Without adequate investor protections to safeguard the integrity of the private placement marketplace, investors should and will flee from the market, leaving small businesses without an important source of capital.”

Comments on Proposed Rule

Rule 506 also has been used by legitimate small businesses as an important source of capital, and I want those businesses to be able to thrive and create jobs without unnecessary regulatory impediments. However, a healthy private placement marketplace requires investors who feel adequately protected.

Even though the JOBS Act requires the SEC to ease what are already lax restrictions in Rule 506, it is important for the Commission to adopt sensible and reasonable safeguards for investors. In the new rule, the Commission should:

  • establish specific steps that an issuer could take to verify that an investor is accredited;
  • require the filing of a Form D in advance of any public advertising and place reasonable restrictions on the advertisements, and
  • finalize the bad actor disqualifications in Rule 506, as mandated by the two-year-old Dodd-Frank Act.

NASAA recognizes there are competing interests with different opinions on how to Commission should move forward on this issue. But by releasing a proposed rule that does nothing more than recite what is already in the JOBS Act, the Commission has neglected its duty to both issuers and investors.

The proposed rule fails to give sufficient guidance to issuers, even though that type of guidance is mandated by the JOBS Act, and it fails to implement any protections for investors, even those that would be minimally burdensome to issuers.

State securities regulators understand that the Commission must follow the mandate of the JOBS Act, even though we expect that broad public advertising of highly speculative, highly illiquid, and sometimes fraudulent investment opportunities will lead to more enforcement actions.

But we are greatly disappointed by the Commission’s failure to include even the most modest of measures to mitigate the impact on the investing public – especially given the SEC’s history and experience in this area.

Today, the Commission has the opportunity to implement the JOBS Act in a way that satisfies its mandate while minimizing the harm to investors.


Some of our suggestions, such as the change to the Form D filing deadline, would greatly assist our efforts to police the market while being minimally burdensome to issuers.

Other suggestions, such as accredited investor verification, are reasonable issuer requirements that facilitate investor trust necessary to promote investment.

But rather than choosing the most reasonable and appropriate path amid competing viewpoints, the Commission did nothing.

As the SEC’s partner in investor protection and as advocates for small business capital formation, NASAA urges the Commission to reconsider its course and adopt rules that facilitate the proper use of Rule 506.

While we disagree with the policy choices made by Congress in much of the JOBS Act, we realize that the Commission has the responsibility of effectuating the Act’s statutory provisions. This does not mean that the Commission may abdicate its responsibilities in promulgating rules.

October 9, 2012


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