During her keynote address at the 47th Annual Securities Regulation Institute on October 28, 2015, SEC Chairman Mary Jo White reminded us that the securities industry is an industry closely monitored by its regulators. While the speech focused attention on the dramatic changes in capital raising now permissible through the JOBS Act, White made clear that enforcement investigations and actions were a critical part of the SEC’s monitoring of the industry.
White stated that enforcement investigations were open and focused on the Rule 506 offering space, focusing on discrete areas such as issuers’ failures to take reasonable steps to verify the accredited status of investors (required by Rule 506(c)), sales to unaccredited investors, and unregistered broker-dealer activity, as well as some instances of fraud.
White did not comment on Reg A investigations, as it is still too early to see the enforcement trends in this area, but we can expect a steady stream of investigations as the SEC police’s industry practices.
FINRA has also been active in the JOBS Act space. It has been actively monitoring funding platforms websites to ensure the content standards of FINRA’s advertising rules are met. FINRA has directly reached out to a number of its members to raise issues with marketing practices.
Recently, FINRA issued Regulatory Notice 15-32 which highlighted FINRA filing requirements for Reg A offerings. In the Notice, FINRA emphasized that broker-dealers’ must meet FINRA advertising standards, including that any communication be fair, balanced and not misleading. FINRA also suggested that it will carefully review Reg A offerings to ensure that FINRA members comply with suitability standards.
FINRA shortly will assume a more central role in the JOBS Act industry as the primary regulator of broker-dealers and the newly created “funding portals,” which are required to participate in Title III crowdfunding capital raises.
With all the revolutionary changes triggered by the JOBS Act, the recent speech by White reminds us that the securities industry is highly regulated. Both the SEC and FINRA are already active in this space, and it is only a matter of time before investigations and enforcement proceedings are constant as the industry continues to mature. While the JOBS Act provides tremendous opportunity for capital raises, proper precautions and care should be employed to ensure that your capital raising under the JOBS Act is in compliance with the law and sufficient to meet the imminent regulatory scrutiny.
About Scott Andersen:
Scott is principal at finLawyer.com and General Counsel of FundAmerica. He was most recently the Deputy Regional Chief Counsel at FINRA, and prior to that was the Enforcement Director at FINRA and the NYSE, Co-Chief of the Securities Prosecutions Unit of the NY Attorney General’s office, and Asst. Attorney General for the State of NY. He concentrates his practice on securities and regulatory law.
The information and materials in this article are provided for general informational purposes only and are not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.