I’m not planning to run late night ads for a latest security offering. But what could the Securities and Exchange Commission do about it? Keith Bishop asks: Can the SEC really create illegal actions by its own failures to comply with the law?
Last year’s JOBS Act contained an explicit mandate with an explicit time frame.
Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules issued in section 230.506 of title 17, Code of Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors.
However, 90 days was never a feasible deadline to draft a rule, make it available for comment, respond to the comments, and publish a final rule. Congress could have made the change a statutory one, leaving the SEC rule explicitly out-of-date. But instead they mandated a regulatory change.
The first question is what would the SEC do to a violator? The SEC has published a JOBS Act page full of Frequently Asked Questions. Under Title III for crowdfunding the SEC published a statement warning would be entrepreneurs that securities crowdfunding is not legal until the regulations are finalized. The FAQ for Title II turns to the Broker-Dealer exemption for advertising. I don’t take the lack of a warning to mean that the SEC won’t prosecute. But given limited resources, you would have to wonder why the SEC would bother.
Assuming the SEC did prosecute, what would the courts do? …
I think I’ve gone on long enough. At this point, your offering is tied up in expensive legal roadblocks and your burning through cash to pay your lawyers. Whatever advantage you thought you might gain from advertising is gone.
Some brave soul may step up and be willing to test the advertising waters out of principle. But it would be a test rooted in sensible economic analysis.
Doug, would be interested in your take on those FAQs. They seem to deliberately misread the legislation vis a vis compensation. I say that mostly based on the “separate compensation” reference in the language about ancillary services.
As for testing the advertising waters, I agree with you, probably imprudent to do so; but at the same time, so many seem to be bending the general solicitation ban, it would be better to not leave the implementation in limbo. The industry might be best served by calling “interim final” the August proposed rules.
You have a great discussion on the broker-dealer/angel platform exemption, so I left my thoughts on your blog: http://www.wac6.com/wac6/2013/02/sp.html#comment-797748328