Attorneys General Becerra, Healey, Rosenblum, and Racine Warn SEC Against Reducing Investor Protections in Private Offerings
SACRAMENTO – California Attorney General Xavier Becerra, Massachusetts Attorney General Maura Healey, Oregon Attorney General Ellen Rosenblum, and Attorney General for the District of Columbia Karl Racine today warned the Securities and Exchange Commission (SEC) against reducing investor protections in private securities offerings. The coalition filed a comment in response to the SEC’s Concept Release on Harmonization of Securities Offering Exemptions (Concept Release), in which the SEC suggests significantly reducing disclosure and reporting requirements for offerings that are exempt from federal registration requirements. Private securities offerings typically hold greater risk than public offerings and are not subject to the same disclosure and reporting requirements. The SEC’s proposal seeks to further reduce such requirements on private offerings and expand the definition of “accredited investor” — a term generally used to describe well-heeled investors judged capable of fending for themselves without many key regulatory protections. In fact, many “accredited investors” are elderly or lack the sophistication needed to make prudent investment decisions in the absence of existing safeguards. While the SEC claims these changes will open up private markets to mom and pop investors, it lacks the data to support these claims and the experience of state securities regulators and consumer groups suggests that private securities offerings are subject to a higher incidence of fraud. The rush to lower investor protections without any analysis of the consequences reflects the SEC’s reckless faith in an unregulated market, one that, time and time again, has been shown to reward Wall Street at the expense of Main Street.
“As we’ve seen in California, home to a thriving startup industry and the fifth largest economy in the world, there is no lack of funding for startups and private ventures,” said Attorney General Becerra. “Nevertheless, we lack a clear picture of how investors and issuers fare in unregistered offerings. The SEC’s suggested deregulation could create even more risk for everyday investors. The agency needs to take this risk into account in changing any regulations, and work to ensure a balance of power in our markets.”
“The SEC is proposing to scale back registration requirements that provide critical and needed safeguards for smaller investors. Without studying what risks a change like this might pose, the SEC is putting everyday investors at risk,” said Oregon Attorney General Ellen Rosenblum.
The coalition emphasizes the importance of the current restrictions on exempt offerings for the protection of investors and urges the SEC to not loosen current regulations without putting into place adequate additional protections.
In the letter, the coalition provides the following observations and recommendations:
- State-level investor protections are crucial, as states are often at the forefront of identifying and taking action against schemes to exploit investors;
- Before making changes to any of the current exemptions from federal registration, the SEC should study investor and issuer outcomes in exempt offerings. The Concept Release offers essentially no data about how investors—especially retail investors—fare in exempt offerings, nor does the Release include any data about the results for issuers;
- The SEC should gather data to determine what type of investors want to participate in exempt offerings. Current data shows that a significant majority of households are unlikely to have sufficient surplus income or wealth to invest in highly risky and illiquid exempt offerings, and likely would prefer to participate in public markets which hold less risk;
- Exemption from federal registration should be limited to situations in which investors have sufficient power to demand and receive material information from issues, and have sufficient wealth to tolerate significant risk and loss; and
- SEC should require issuers to provide less sophisticated investors with key material information about, for example, the issuer’s financial health, business performance, and capital structure.