The law is a balancing act. We debate endlessly, for example, as to whether airport full-body scanners are justifiable in the interest of national security and passenger safety, despite the clear intrusion to personal privacy rights. From time to time, this same balancing arises in the context of the nation's securities laws and the policies of the Securities and Exchange Commission ("SEC"). Conceptually, the government certainly has the right to regulate and place reasonable restrictions on "commercial speech." Similarly, the government has the right to mandate disclosure of certain arguably "private" information. The question, however, is whether the SEC has swung the pendulum too far and has stifled rights guaranteed by the First Amendment of the U.S. Constitution.
Recently, Goldman Sachs announced that it would not indirectly offer Facebook shares to U.S. customers because "the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law." Unfortunately, the SEC's prohibition on general solicitation does little-to-nothing for investor protection. Assuming that private placements only are sold to suitably qualified investors, it is difficult to see how the public is harmed by media reports of the transaction. As was the case with Goldman's investment in Facebook, now unavailable to even sophisticated U.S. investors, this sort of faulty reasoning not only chills the First Amendment rights of issuers engaged in private placements, such as hedge fund, private equity fund and venture capital fund managers, but also increases the cost of legitimate capital formation and impedes the ability of qualified investors to take advantage of legitimate investment opportunities.
Fortunately, this issue may get some much needed clarity. There is a case currently pending in Massachusetts, In the Matter of Bulldog Investors General Partnership, et al. The matter arises from a complaint filed by the Massachusetts Securities Division against Bulldog Investors, an investment management firm operated by Phillip Goldstein (yes, the very same Phillip Goldstein that had successfully challenged the SEC's view of who is a client of an investment adviser, a fund or the investors in a fund). In the Bulldog Investors case, Bulldog sought to make certain information available on its website. This action, however, effectively was deemed to be a general advertisement and solicitation and the trial court ruled that the Massachusetts Securities Division did not violate Bulldog's First Amendment Rights. The case is now on appeal.
In another case, summarized below in this issue of the Update, the D.C. Circuit Court effectively ruled that the disclosures to the SEC mandated by SEC Form 13F do not violate First Amendment concerns. It is unclear what the SEC does with the information on Form 13F, which requires certain large institutional investment managers to disclose information regarding certain of its equity positions.
So, without any cynicism intended, it is ironic that the SEC is impeding legitimate "speech" which may be deemed to be a general solicitation, but mandating disclosure of other information, which arguably is "private" without a clear justification for that infringement on privacy! Clearly, Congress and the SEC need to take great care in re-setting the pendulum in order to impose only such restrictions on fundamental, constitutionally protected rights, as are absolutely required for the protection of investors and the general public.