Securities Industry Commentator by Bill Singer Esq

SEC Proposes Rule Changes to Harmonize, Simplify and Improve the Exempt Offering Framework / Proposed amendments would provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections (SEC Release)

Harmonizing, Simplifying and Improving the Exempt Offering Framework by SEC Chair Jay Clayton 

Statement on Proposed Amendments for Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets by SEC Commissioner Hester M. Peirce

Statement on Proposed Amendments to the Exempt Offering Framework by SEC Commissioner Allison Herren Lee

Statement on the Harmonization Proposal by SEC Commissioner Elad L. Roisman

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19) / SEC is closely monitoring the impact of the coronavirus on investors and capital markets (SEC Release)

[In]Securities Guest Blog: The Fever by Aegis Frumento Esq (BrokeAndBroker.com Blog)

Two Bank Insiders And A Third Man Arrested In Bank Bribery And Money Laundering Conspiracy (DOJ Release)

Please Consider Adding a Trusted Contact to Your Account / FINRA and the SEC's Office of Investor Education and Advocacy are issuing this Investor Bulletin to urge you to consider adding a "trusted contact person" to your brokerage account (FINRA Release)

UTMA and UGMA Accounts / FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts (FINRA Regulatory Notice)

The Securities and Exchange Commission today proposed a set of amendments to the exemptive framework under the Securities Act of 1933 that would simplify, harmonize, and improve certain aspects of the framework to promote capital formation while preserving or enhancing important investor protections. 

The proposed amendments would:

• address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
• increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the Commission's experience with the rules, marketplace practices, capital raising trends, and comments received;
• provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain "demo day" activity without running afoul of the prohibition on general solicitation; and
• harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.

The proposed amendments seek to address the gaps and complexities in the offering framework that may impede access to capital for issuers.  I believe the complexity of the current framework particularly affects those smaller issuers that are more likely to rely on the exemptions to raise capital-including rural issuers, and women, minority and veteran-owned issuers-the types of issuers whose limited resources spent on navigating our complex rules are diverted from direct investment in the issuers' growth.  The amendments would benefit issuers and investors by creating an offering framework that is more consistent, transparent and rational. 

[I]nvestors need to be able to trust the integrity of the marketplace, so antifraud protections are essential.  Investor protection also encompasses writing rules that foster effective disclosure.  Effective disclosure does not mean disclosure that pleases lawyers whose minds have been shaped by years of reading regulations.  Rather, our rules should be designed to encourage issuers to communicate when, where, and how investors prefer.  Investor protection also means allowing investors of all income levels to participate in a wide range of offerings that allows them to build balanced and diversified portfolios.  The proposal today demonstrates a recognition of some of these often-overlooked tenets of investor protection.    

[M]y disagreement is with the policy direction of this proposal, which blurs important differences between public and private markets - differences that go to the heart of our core mission of protecting investors.

Among other things, today's proposal would:

This does not reflect a balanced approach to revising the exempt offering framework. 

I state often that we must encourage and facilitate the entrance of companies to our capital markets, and I think the SEC's work to update our regulations relating to private offerings can help accomplish that. This proposal is based on our study of the different profiles and needs of companies raising money in our private markets and how the current exemptions are utilized.

My vote is not intended to expand the private markets, but to simplify and adjust our exempt offering framework with the hope that the proposed changes will make it easier for private companies to transition to public companies. Encouraging and enabling issuers to raise capital in our private markets earlier may result in them raising money in our public markets at an earlier growth stage than we presently see. This, in turn, could allow Main Street investors to invest in public companies that have more growth potential.

The Commission has enacted this Order having due regard for the needs and safety of companies impacted by COVID-19 while also considering the importance of markets and investors receiving materially accurate and timely information. For those companies seeking to rely upon the Order, attention is directed to the various conditions, including the requirement to furnish a Form 8-K or Form 6-K by the later of March 16 or the original reporting deadline.

In connection with the Commission relief issued in the order, the Commission staff will take the following positions with respect to certain obligations under the Securities Act and the Exchange Act:

From at least in or about March 2019 up to and including at least in or about March 2020, CHANCY and ILORI conspired to obtain business loans fraudulently from a third-party commercial lender with the intent to "bust out," that is, not repay, the loans.  CHANCY and ILORI submitted eight fraudulent business loan applications for a total of $1,025,000 in business loans in furtherance of this scam.  The business loan applications submitted by CHANCY and ILORI included doctored bank statements and listed the identities of other persons as the loan applicants.  CHANCY and ILORI also opened bank accounts using the identities of those other persons in order to receive the loan payments from the third-party commercial lender.  CHANCY and ILORI believed that the underwriter for the third-party commercial lender was participating in the scheme and agreed to pay the underwriter a "commission" for the underwriter's role in the scheme.  In reality, however, the underwriter was an undercover law enforcement officer.

To effect their illegal scheme, CHANCY and ILORI conspired with bank insider ALBARELLA to launder approximately $1 million of the expected proceeds of the loan scheme.  ALBARELLA opened a bank account at Bank-1 using a stolen identity in order to launder the proceeds of the loan scheme, and ALBARELLA accepted a $10,000 bribe in order to open the bank account.    

Why would you add a "trusted contact person" to your brokerage account?

UTMA/UGMA Accounts are custodial accounts that allow for the transfer of funds, securities and other assets to minors without the need for a formal trust. UGMA and UTMA are model laws developed and approved by the Uniform Law Commission. All states have adopted some version of either UGMA or UTMA through their state legislatures to allow for the establishment of UTMA/UGMA Accounts. While the specific requirements for UTMA/UGMA Accounts vary from state to state, the accounts share common characteristics. Generally, when UTMA/UGMA Accounts are established, the donor appoints a custodian, designates a minor beneficiary and deposits assets into the account. Depositing assets into an UTMA/UGMA Account represents an irrevocable transfer from the donor to the beneficiary. 

The custodian is responsible for managing the assets in the UTMA/UGMA Account, including executing transactions and withdrawing or transferring funds, for the benefit of the beneficiary (i.e., the custodianship) until the custodianship terminates. The custodianship generally terminates when the beneficiary reaches the age of majority, reaches an alternative age of termination set forth in the relevant state statute or dies. Some states also permit extending the custodianship to a higher specified age by the donor when establishing the custodianship or by the custodian, provided that the beneficiary receives notification of his or her right to compel distribution of the assets upon reaching a specified age. 

[F]INRA has also found that some member firms permitted customers to open UTMA/UGMA Accounts, yet failed to have reasonably designed systems and procedures to supervise UTMA/UGMA Accounts, including reasonable diligence procedures to determine the authority over those accounts in and around the time the beneficiary reaches the relevant age. In addition, some member firms permitted custodians to effect transactions and withdraw or transfer funds from UTMA/UGMA Accounts months or years after the custodianship terminated, and ignored red flags of the activity (e.g., customer complaints).

• Securities Industry Commentator
• Bill Singer