September 13, 2009
Johnson on Private Placements
Private Placements: A Regulatory Black Hole, by Jennifer J. Johnson, Lewis & Clark Law School, was recently posted on SSRN. Here is the abstract:
Many investors, including vulnerable senior citizens, are victimized each year in dubious securities offerings, yet governmental regulators can do little to intervene. Utilizing the Rule 506 private placement exemption, promoters today can escape regulatory review by both federal and state securities officials. While states at one time served as “local cops on the beat” to protect their citizens, in 1996, Congress preempted state authority thus creating a situation in which suspect investment schemes can proliferate below any governmental radar screen. This paper questions the continued wisdom of this regulatory vacuum, especially in light of recent financial events. This paper thoroughly reviews the legislative history of this preemptive statute known as NSMIA and concludes that the preemption of private placements either resulted from congressional misconceptions; back room politics resulting from the conservative deregulatory era of the decade; or both. After analyzing the regulations and private placement market in both as it existed in 1996 and as it operates today, the paper concludes that NSMIA’s poignant preemptive force primarily impacted state authority over the smaller, most risky private placements. Combined with the lack of federal oversight, this statutory preemption created a regulatory abyss that permits many questionable offerings to take place. In its zeal to deregulate, Congress left many investors with little if any governmental protection. The paper proposes returning to the states the supervision of designated private placements. This modest proposal would foster capital formation, protect investors, and provide for a more rational and efficient legislative framework to regulate private securities transactions.
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