SEC Commissioner Advocates for Disclosure Obligations on Private Offerings
Commentary by Steven Lofchie
SEC Commissioner Caroline A. Crenshaw advocated for imposing disclosure obligations on certain Regulation D ("Rules Governing the Limited Offer and Sale of Securities without Registration") private placements.
In an address before the Securities Regulation Institute, Ms. Crenshaw said that in recent years, Regulation D has been used for purposes beyond its original intent of allowing small businesses to raise capital. She said that larger companies have used the rule to raise massive amounts of capital from accredited investors while avoiding the SEC's public offering disclosure requirements. She acknowledged arguments by some market participants that the size and sophistication of accredited investors removes the need for disclosure protections, but cited the failure of several companies funded through private placement offerings, including FTX, Theranos and WeWork, as a reason to impose additional disclosure obligations on private offerings.
To prevent further misuse of Regulation D, Ms. Crenshaw urged the SEC to (i) require issuers to file a Form D prior to any Regulation D solicitation, (ii) require issuers to include "useful, substantive information" in Form D filings and (iii) implement a two-tiered framework that would impose heightened obligations on issuers based on certain size measures (such as size of the issuer, the value of the offering or the investor base). She proposed a requirement for larger issuers to provide an independent financial audit as part of a filing.
Commentary
There is another way to entice private issuers to become public companies, and that is to reduce the burdens of being a public company. Not only do the majority of commissioners appear to be ignoring the past, but the new regulatory burdens they are proposing, such as ESG requirements, would make going public even more expensive and thus less attractive.
There is some trade-off between the benefits of going public and those of staying private. If the only inducement regulators will consider to motivate companies to go public is to increase the burdens of private offerings, that is not going to work. Any such burdens seem light when compared to those that public companies are required to bear.