NEW YORK ( The Deal) -- The Securities and Exchange Commission has scheduled a July 10 meeting to consider whether to adopt rules to eliminate the prohibition against general solicitation and general advertising in private placements and to disqualify securities offerings involving so-called "bad actors." The SEC has come under pressure to approve the proposed rule for ending the ban on general solicitation, as the commission is a year beyond a congressionally mandated deadline under the Jumpstart Our Business Startups Act. As the proposed rule is currently written, however, it is likely to draw a legal challenge from consumer advocates who argue that it could leave smaller investors more vulnerable to fraud. A way out of the quandary may be for the SEC to first enact the so-called bad actor rule, which would prohibit people who have been convicted of securities fraud from participating in private placements. The commission is required to adopt the bad actor rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Allowing general solicitation of private placements would permit unregistered securities to be marketed on the Internet, television and in other mass media, even though unregistered securities can generally only be sold to accredited investors. Investor advocates including Barbara Roper of the Consumer Federation of America have called for the SEC to go back to the drawing board and repropose the general solicitation rule to include investor protections. That position is shared by at least one SEC commissioner, Luis Aguilar. The bad actor disqualification rule was proposed back in 2011 as required by the Dodd-Frank Act of 2010. The disqualification provisions in the proposed rule would apply to securities issuers, which includes various executives, 10% stakeholders, promoters and other entities involved in the offering or solicitation of prospective purchasers. Legal actions such as criminal convictions, court injunctions, broker-dealer disciplinary orders and other regulatory orders could disqualify those enumerated in the rule from participating in the offerings. The SEC has not held a public meeting on the bad actor rule since January 2012. It had been held up by opposition from Republican SEC commissioner Troy Paredes and former Republican commissioner Kathleen Casey. They objected to the rule being applied retroactively, arguing that it could hurt capital raising by the smallest companies.
Paredes, Casey and others argued that many, if not most, investment banks had been parties to enforcement actions brought by the SEC. If banks were subject to the bad actor rule for their past violations, they would be disqualified from arranging private placements under Rule 506 of the Securities Act. That could have chilled capital raising by the small-cap companies that rely on public investments in public equity, or PIPEs, to raise money. Written by Dan Lonkevich