Future of Private Placements

Last week SEC Chair Jay Clayton announced that the SEC has begun a study to completely revise the matrix of laws and rules that permit the sale of securities without filing a Federal prospectus.  Characterizing the current system as a patchwork and noting that it grew incrementally as the government increasingly liberalized or clarified the groundrules for private placements, Clayton promised a “concept release” that would reformat and rationalize the placement rules to make them more easily understood by business.

Followers of the SEC know that a concept release can take a long time to produce as it wends its way through the SEC, and then it is open to comment and public input which may lead to proposed legislation or regulation which, in turn, must move through the Congress or through the drafting and public comment process for new SEC regulations.  So don’t expect immediate clarifications.  But surely our current system could use rationalization.

A couple of recommendations from this quarter: why not preempt State regulation so we have a single Federal system?  Why not address the issue of deregulating people who act as agents in raising funds in private placements, rather than requiring that they hold a BD ticket (or violate the letter of the law, as is common in present practice)?  Why not either simplify or scrap crowdfunding, which is seldom used to date, is complex and labor-intensive, makes risky equity plays available to people who cannot afford it, and attracts dumb money to highly speculative ventures?  Why not establish a simple, lightly regulated trading market for shares of very large private companies which now function with very many shareholders but are privately held (think Uber for example)?

In the old days, before we had Regulation D and Rule 144, the common law established a level of practice that may not have been clearly articulated to the business community but nonetheless was simple to utilize.  Why not a regulatory scheme that includes a substantially unregulated private capital market for qualified investors, with no need for reporting anything to anyone and with an exemption from State interference (which always was, and remains, a major problem)?

The real issue is fraud and lying.  The real issue therefore is very difficult to regulate.  We know it is illegal to defraud and lie.  Now all we need is a system that prevents it.  I bet Clayton doesn’t try to tackle that one….   We rely primarily on back-end enforcement and if anyone out there has a better plan, please let us (and Clayton) know.


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