Ed's Blog

SEC mostly ignores us, proposal weakens investor protections

By Ed Mierzwinski
Consumer Program Director

Yesterday, the Securities and Exchange Commission (SEC) issued a proposed rule implementing the controversial, mis-named and PIRG-opposed JOBS Act. It isn't really about jobs. The new law is in fact designed to reduce supposed burdens on smaller, "emerging" companies to file Initial Public Offerings (IPOs), including by recruiting investors on the Internet (crowdfunding). Companies big or old or even foreign can easily take advantage of the law's lower standards, despite the plethora of references to its intent to help small firms.

Among other problems, the proposed rule fails to protect small investors from a likely onslaught of sales pitches both online and on the phone. And these won't be relatively tame sales pitches, since the JOBS Act also repeals longstanding limits on general solicitations and advertising by private equity and hedge funds. Yet, the proposed rule places no restrictions on their marketing practices, such as setting basic standards for performance claims. Positively, it's only a proposed rule, not an interim final rule as we had expected until, along with allies, we put pressure on the SEC.

Unfortunately, the proposed rule sets such a shockingly low starting bar of investor protection that, in a joint press release, the Consumer Federation of America and the PIRG-backed Americans for Financial Reform called for the proposal to be rescinded and then re-proposed:

"The SEC has provided a comment process during which the shortcomings discussed here could theoretically be addressed. It is important for those committed to preserving the integrity of our financial markets to participate in this process. It is difficult to see, however, how the Commission could end up adopting even a minimally acceptable final rule on the basis of this proposal. A re-proposal is necessary, incorporating basic protections such as those outlined above. In the meantime, it is incumbent on the Commission to conduct a meaningful economic analysis of its proposed rule, based on a careful examination of the risks to investors."

Earlier this month, U.S. PIRG joined the CFA and AFR, Fund Democracy, the AFL-CIO, leading SEC scholars and others in a detailed comment letter to the SEC explaining what needs to be done by regulation to protect investors from the worst excesses of the JOBS Act. In our letter, we point out that just as the SEC is required to implement the JOBS Act, it is also required to protect investors while it does so.  While parts of the comment letter address highly technical rulemaking procedures ("Danger, Will Robinson!), other parts of it simply explain the myriad new threats to investors posed by "the growth of the Internet; the increasing complexity of financial products and financial planning, and the development of private trading markets," any of which, we argue, warrant strengthened investor protections "regardless of any JOBS Act mandate." 

As we point out in the letter, look no farther than the Internet's potential to promote investor fraud schemes: "The evolution of social media has increased the likelihood of affinity fraud in cyberspace, where the potential reach and thus the potential harm is multiplied exponentially."

Comments

I wish there was some way those FOR making it easier for startups to get funding and those AGAINST making it easier for rich people to invest in startups could get together and see if they could even agree on some facts or use some common language. From my perspective as a startup lawyer in the angel financing ecosystem, there just isn't a problem with Rule 506. The proposed SEC rules are good in my book.

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