RIA Compliance Blog

In his first public speech as the newly-appointed head of the SEC, Chairman Jay Clayton delivered an outline of the “guiding principles” that he will look to in guiding his leadership of that agency going forward. Clayton delivered his remarks on July 12^th to the Economic Club of New York in New York City. The full text of Clayton’s speech may be found on the SEC’s website.

The primary takeaway from Clayton’s speech is that under his tenure, capital formation issues will likely take a higher profile, and, in turn, the concerns of businesses seeking ways to raise capital will likely be given a heavier weight of consideration than in the past.

In what was generally a bullish speech for the advancement of capital formation, Clayton first and foremost reiterated the SEC’s three-part mission to: (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. However, Clayton specifically noted that “each tenet of that mission is critical,” stating that “if we stray from our mission, or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”

Approximately 35 states have created exemptions in their securities acts or rules in order to allow businesses seeking relatively small amounts of capital to raise funds locally without undergoing an expensive and complicated registration process. Offerings under these exemptions – typically called intrastate “crowdfunding” exemptions – have usually required compliance with the federal intrastate offering exemption under either Section 3(a)(11) of the 1933 Securities Act, or SEC Rule 147, which allows issuers to avoid the burdens of federal registration as well.

A key element of most of these newly-adopted state provisions has been to allow issuers to use general solicitation to seek investors. However, the federal exemption, together with restrictive historical SEC staff guidance, effectively operated to prohibit internet advertising, and restrict other types of solicitation. The federal intrastate exemption prohibited out-of-state offers of securities, even when those offers were deemed such solely because of their being visible to non-home state residents on the internet. The federal rules also prohibited an issuer formed in another state from availing itself of the intrastate exemption in its “home” state for all other purposes. Other constraints dealing with the issuer’s business activity (such as determining the percentage of its revenue derived from the home state) sometimes complicated the determination about whether an issuer would qualify for the federal, and therefore the state, exemption.

These restrictions, which had not been significantly changed in many years, led to widespread criticism that changing business and legal practices, not to mention the rise of the internet as a marketing tool, had made the intrastate exemption largely obsolete.