The SEC, the First Amendment and general solicitation

Cite this Article
Larry Ribstein, The SEC, the First Amendment and general solicitation, Truth on the Market (February 03, 2011),

Attorney Joseph McLaughlin (whose firm represents Goldman) writes in today’s WSJ about the approaching confrontation between the SEC and the First Amendment over the issue of general solicitation: 

Goldman Sachs stated that it wouldn’t offer Facebook shares to U.S. customers because “the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law” * * *

The source of the problem is that the SEC has a built-in bias against private placements. The SEC is in business to impose disclosure requirements on public companies. So when a company avoids the public markets by finding private investors who are satisfied with less disclosure, the SEC takes this as an implied attack on its mission.

 One way the SEC defends its turf is by keeping its rules on private placements vague. The best example of this is its stubborn prohibition of any “general solicitation”—meaning publicity—in connection with a private placement. With the revolution in communications technology, this prohibition is a significant impediment to capital formation. * * *

[T]he SEC never explained how unsophisticated investors could be harmed by the advertising of offerings in which they could not participate.

As McLaughlin notes, “[w]hat really annoys the SEC is that fewer IPOs now take place in U.S. capital markets.”  Of course the reason for that, as I’ve discussed, is escalating securities law requirements that have significantly increased the costs of being publicly traded.

McLaughlin concludes:

Thankfully, the SEC’s ability to stifle truthful communications might soon be tested under the First Amendment. A case pending in Massachusetts challenges whether the state can impose penalties on companies that make general solicitations in connection with private placements. However the state court decides, it will not be long before the issue gets to the U.S. Supreme Court. When that happens, it is hard to imagine the state—or the SEC—being on the winning side.

I wrote last month about that case brought by Bulldog Investors:

The basic problem here is that Bulldog lost its exemption when it generally advertised its fund through its website and followup email.  As a result, it is broadly barred from distributing information about its funds, however truthful, including to people who are accredited investors* * *

[Professor Laurence] Tribe’s participation suggests the constitutionality of the securities laws may finally get the attention the issue has long deserved.  * * * Citizens United suggests this attention may not be favorable to those laws * * * The Massachusetts case threatens the entire scheme for new issues under the Securities Act of 1933 * * *

I have recently blogged here and here about the First Amendment challenge to the SEC’s proxy access rules.  And here’s my recently posted paper, The First Amendment and Corporate Governance, on the implications of Citizens United for such cases.

Securities regulation is about regulating speech.  When the speech is fraudulent, the regulation probably survives.  But when Congress and the SEC start throwing burdensome nets on truthful speech with little effort to justify the regulatory cost, they should be ready for a constitutional battle, particularly after Citizens United.