My ABA Panel: Part IV – Dodd Bill's Treatment of Rule 506 Preemption: Off the Table?

You may recall from prior blog posts that the bill that Sen. Chris Dodd’s Banking Committee passed, known as the Restoring American Financial Stability Act of 2010, contained a provision authorizing the SEC to designate a class of securities as not “covered securities” (which are exempt from state securities regulation) if an offering is not of sufficient size or scope. The SEC would have 120 days after a Form D filing to review the offering. If they do not review the offering, the security is no longer a covered security and is subject to state regulation.

In publications such as the PIPEs Report, some players declared this might effectively end the utility of Regulation D. Some thought this was driven by the state regulators, who would seem to benefit. At my ABA panel last week, Denise Crawford, head of the North American Securities Administrators Association (NASAA), vehemently denied this, calling the proposal a “complete disaster” and “totally unworkable.” In fact, NASAA felt it important enough to issue a press release on the subject. For example, said Ms. Crawford, the SEC has 120 days to review what? Many offerings do not have full disclosure documents.

The good news: another panelist in the know said that the 120 day scheme is “temporarily or permanently off the table.” It is true that the latest published version of the bill still includes the provision, known as Section 926. But the intelligence of those at the table was that this probably will go away. However, it may well be replaced by something that NASAA supports: namely, making Rule 506 offerings subject to the “bad boy” disqualification provisions currently included in Rule 505 of Regulation D. If this were to occur, I would hope that Congress takes a close look at the specifics of the disqualification provisions. Some feel that the definition ropes in some folks that maybe don’t deserve the moniker “bad boy” (or girl of course).

We will continue to follow this and let you know what we know when we know it.

Leave a comment