In addition to the sweeping reforms proposed by Senator Dodd’s Restoring American Financial Stability Act of 2010 (the “Dodd Bill”) targeting hot button topics such as “say on pay,” proxy access and compensation clawback, the Dodd Bill proposes significant limitations on the availability of Regulation D promulgated under the Securities Act of 1933. Generally speaking, by complying with Regulation D an issuer may conduct a private securities offering without registering with the SEC.

Section 926 of the Dodd Bill proposes several revisions to Section 18(b)(4) of the Securities Act which, if enacted, could undermine the utility of relying upon Regulation D in conducting private securities offerings. The proposed revisions to the preemptive reach of Regulation D under the Securities Act would limit the types of securities that may be offered pursuant to Regulation D, and make the Regulation D offering process less efficient and more uncertain by subjecting Rule 506 filings to a 120-day SEC review period.

The key revisions proposed by Section 926 are as follows:

  • The SEC will designate certain securities as “non-covered securities” and thereby exclude the offering of such securities from preemption under the Securities Act. The SEC will consider the size of the offering, the number of states in which the securities are being offered and the nature of the offerees in determining whether the securities are “non-covered securities.” This change, if adopted in its current form, could undo many of the benefits that were provided by the National Securities Markets Improvement Act of 1996.
  • The SEC will review all Rule 506 offerings within 120 days of filing. If the SEC fails to review an offering within 120 days of filing, the security will no longer be a “covered security” and Rule 506 will be unavailable unless a state securities commissioner has determined that (i) there has been a good faith and reasonable attempt by the issuer to comply with the filing requirements, and (ii) any failure to comply with these requirements was insignificant to the offering as a whole.
  • The states are allowed to impose notice filing requirements.  

The Dodd Bill also proposes an upward adjustment to the current accredited investor standard under Regulation D to account for the effects of inflation.

The purpose of the Dodd Bill’s limitations on Regulation D is not entirely clear, as there is no specific problem with Regulation D identified. The likely effect, though, appears to be greater oversight of private offerings by the SEC and perhaps exclusive oversight by the states of certain offerings that were previously preempted by Regulation D.

If adopted, these amendments to the Securities Act will reduce issuer flexibility in conducting private offerings, result in more delays in executing certain private offerings and likely increase the costs of conducting such offerings.

We are monitoring this bill and will report on any important developments.

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