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The U.S. Securities and Exchange Commission (SEC) has a well-deserved reputation for being a top federal agency. Since its inception as one of the New Deal’s premier institutions, it has aggressively policed the integrity of our capital markets and protected the public from various types of securities fraud. Such vigilance is needed now more than ever after the SEC’s astonishing finding that more than 5 million senior citizens annually are victims of investment fraud. The SEC’s most effective tool to safeguard individuals from financial chicanery is the statutory requirement that those who sell securities must first register them with the SEC. This process compels those who would raise money to make complete and forthright disclosure of all significant aspects of their operations. Registration statements are public documents, vigorously reviewed by the SEC’s staff if the issuer is unseasoned or suspected of any deceptive practices. Falsehoods there or any omissions of material facts not only are crimes, but also impose stringent civil liability on all those behind the offering. This administrative oversight of the sale of securities supports capital formation by fostering a business climate in which investors can be confident that they are being treated fairly. Yet the federal securities laws also recognize that there are certain circumstances in which the cost and efforts of preparing a registration statement are not necessary. A lengthy jurisprudence has thus developed regarding exemptions to this procedure, principally the one for “transactions not involving any public offering.” The SEC has used its rule-making authority to define those situations, called private placements. It historically has allowed the sale of securities to individuals who do not need the protection of registration because, as the case law has put it, they can “fend for themselves” in making investment decisions. In 1981, the SEC broke new ground in this area by proposing that some financial institutions and wealthy individuals could, subject to certain conditions, be sold securities without registration. Commentators at that time questioned whether affluence alone would make an individual able to understand and bear the risks of an unregistered offering since such “accredited investors” needed only to have net worths of $1 million or annual incomes of $200,000. The SEC, however, approved those standards for exempt private placements in its then-new Regulation D. At that time, as Professor Marc Steinberg of Southern Methodist University has found, $1 million had the equivalent value of more than $1.7 million today. Just 1.8% of U.S. households thus qualified for accredited investor status then as opposed to 8.5% now. Yet the SEC has indicated it will not adjust this figure for inflation until 2012 and will do so at that time only using 1996 as a baseline. Even worse, the SEC is now putting forth a plan to create another category of accredited investors that would consist of individuals with as little as $750,000 of “investment owned” funds. With the substantial appreciation of late in the market, there must be a large number of retired folks with such accumulations of assets. Yet they can hardly be deemed, by that fact alone, to be sophisticated enough to protect their financial interests. On the contrary, without registration, the elderly can easily fall prey to the blandishments of unscrupulous promoters and fast-talking con men, as the SEC has long feared. In addition, the SEC is proposing to define a new class of “large accredited investors” that would consist, among other things, of individuals with more than $2.5 million in total assets or annual incomes in excess of $400,000. Promoters could make pitches to them in unregistered offerings by means of advertising or general solicitation. Such techniques have been forbidden out of concern that a wide range of investors might be lured into unsafe or speculative offerings. The SEC is also considering a relaxation of its integration doctrine that prohibits issuers of unregistered securities from making such offerings in serial fashion to finance the same business. The SEC has historically held that condoning such activity would artificially divide one money-raising effort and thus abuse the carefully considered exemptions from registration. The SEC’s proposal, however, would shorten the current safe harbor that allows such offerings if they are spaced at least six months apart and permit them if they are made just 90 days from each other. In sum, when it comes to securities offerings, SEC registration should remain the norm. Legitimate businesses have nothing to fear from the full disclosure that it promotes. It offers, however, a forceful antidote to shady deals. As Justice Louis Brandeis put it so well, “Sunlight is the best disinfectant, publicity the best policeman.” Daniel Morrissey is professor and former dean at Gonzaga University Law School.

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