Crown image Columbia Law School

SEC Commissioner Lee Speaks on Leveraging Regulatory Cooperation

Good afternoon. It’s a privilege to welcome you all to the annual Section 19(d) Conference. I want to start by commending NASAA and SEC staff for their work in putting this event together. And thanks to our colleagues from NASAA and FINRA for joining us and for being steadfast partners in our shared investor protection work. Our organizations work closely together throughout the year, but this conference represents an important opportunity for us to reflect on the policy and regulatory concerns that we share, and to deepen our cooperative partnership.

The issues on the agenda today are all critically important for investors: Regulation Best Interest, gamification of trading, ESG, and the private markets. I’d like to touch briefly on each topic but ultimately focus my remarks on the private market and the need for certain critically important reforms to enhance investor protection and increase visibility into that market.

Regulation Best Interest

With Reg BI having been in effect for nearly a year now, we are in a position to begin assessing whether it is functioning as intended – as an elevated standard of care and with clear, understandable disclosures regarding what investors can expect from their advisory relationships. The SEC, FINRA, and the states have all been actively focusing on Reg BI compliance in their examination programs, and those exams should provide a reliable source of data we can mine to consider the effectiveness of the rules as well as potential enhancements.[1] And, as Commissioner Crenshaw observed recently,[2] we are now in a position to test investors’ understanding of the actual Forms CRS that are being filed and other disclosures under Reg BI to determine whether they are effective. Given that disclosure is at the core the SEC’s mission,[3] what could be more important than devoting the resources necessary to ensure we are getting that fundamental undertaking right? What’s more, when we rely heavily on disclosure – as we have with Reg BI – to accomplish our investor protection mission, it is incumbent upon us to employ effective analytical techniques to test the effectiveness of such disclosures.

The “Gamification” of Trading

App-based investing platforms can enhance investor access to the market, and can even be used as investor education tools. But we need to give careful attention to how those apps, websites, and broker platforms are designed and operated. The trading appears to be free to its customers, but – as has been said in numerous ways by numerous commentators – “if you are not paying for the product, you are the product.” Do these apps distort investor perception about the real life consequences and risks of their investment behavior? Behavioral nudges and push notifications on certain of these apps have resulted in as much as 40 times more trading than that on other platforms and, even more concerning, trading of riskier options products to the tune of nearly 88 times that of other platforms.[4] And the more investors trade on these apps, the more money the broker-dealer makes. For smaller investors, however, more trading, and more trading in securities like options, can hurt their bottom line.[5] These market dynamics must not be ignored, and query whether more fulsome disclosures would be sufficient to address the potential conflicts of interest that may routinely put retail investors at a structural disadvantage. I look forward to our continuing consideration of these issues.


On the subject of climate and ESG, we have a lot of work to do to update our disclosure regime to meet the needs and demands of investors. On climate in particular, we should move swiftly to establish a framework that will produce the consistent, comparable, and reliable climate-related disclosure that investors need to price risk and allocate capital. We need to proceed thoughtfully, collaboratively, and in reliance on the best available data. To that end, I would note that we have an open comment period on this subject and I encourage the states to consider submitting a letter offering their perspectives.[6]

Private Markets

Finally, I’ll turn to a topic where collaboration with state regulators is especially imperative: ensuring investors are protected and small businesses are supported in the private markets. State regulators are, as is often said, on the front lines of the fight against fraud, particularly when it comes to unregistered offerings.[7] They are frequently the first and only responders to investor complaints in this space, and we must ensure we are leveraging their experience and expertise as we consider policy changes. We should likewise ensure, as we continue to analyze the exempt offering framework, that our policymaking is informed by data. In this regard, I would like to discuss two key private market reforms the Commission should consider implementing.

First, we should we guided by the data we already have and modernize the accredited investor wealth thresholds. Private offerings lack the traditional investor protections that attach to registration, most importantly transparency and liquidity. Thus, the principal means of protecting investors in private markets is to work to ensure that those offering unregistered securities only sell to investors who can both assess and bear the heightened risks in private markets. The accredited investor definition performs this function, primarily through income and net worth thresholds that have not been updated since they were initially put in place nearly four decades ago. As a result, we have seen an increase of 550 percent in households that qualify as accredited since 1983.[8]

In other words, the data reveals that the wealth thresholds no longer function as they were intended, and it is long past time for us to act on that data.[9] We should update the thresholds, and index them to inflation going forward. Indexing the accredited investor financial thresholds is a common sense step with an extremely broad base of support.[10] It also accords with the approach taken to other financial thresholds affecting the private markets and public companies, including offering limits on Regulation Crowdfunding[11] and the emerging growth company definition.[12]

There is room for debate as to how well financial thresholds operate as a proxy for investment sophistication. But as long as they continue to function as one of the principal investor protections in this market, it is untenable for the Commission to fail to update the thresholds to ensure they remain an effective investor protection tool.

Second, we should enhance the data available to us by implementing overdue reforms to Regulation D. We are all aware of the vast increase in the amount of capital raised in private markets over the last decade, and that offerings pursuant to Regulation D account for the lion’s share of that capital.[13] And yet, despite its size and significance, we have relatively little visibility into the private market.[14] How have we allowed this to happen despite our allegiance to data and fact-based policy making?

A brief history is in order. As we all know, issuers in the private market were traditionally unable to offer or advertise their securities to the general public. Indeed the prohibition against general solicitation in private markets was a hallmark of the important distinction between public and private markets. In 2013, the SEC enacted a rule pursuant to the JOBS Act that allowed general solicitation in certain Rule 506 offerings, reversing a prohibition nearly as old as the SEC itself.[15] The Commission took this action because Congress required it, but notably we already had significant indicators that lifting the prohibition on general solicitation might result in increased fraud and investor protection concerns. In particular, in 1992, the Commission lifted the ban on general solicitation in Rule 504 offerings to help smaller issuers raise “seed capital.”[16] The consequences quickly became clear: Rule 504 offerings became a hotbed for fraud and, by 1999, the Commission had to reverse course and end the unrestricted use of general solicitation under that rule.[17]

Thus we had reason to believe at the time the Commission permitted general solicitation under Rule 506(c) that such a sea change could create significant investor protection concerns. Consequently, in 2013, the Commission proposed further amendments to Regulation D, Form D and Rule 156. Those amendments were intended in part to enhance the Commission’s ability to evaluate market practices in Rule 506 offerings.[18] Indeed, the proposal even included a direction to the Commission staff to develop an inter-divisional “506 (c) work plan” that was supposed to, among other things, “evaluate the range of purchaser verification practices used by issuers and other participants in these offering,” “assess whether the availability of Rule 506(c) has facilitated new capital formation or has shifted capital formation from registered offerings and unregistered non-Rule 506(c) offerings to Rule 506(c) offerings,” and “monitor the market for Rule 506(c) offerings for increased incidence of fraud.”[19]

Unfortunately we did not follow through on this work plan and, even more significantly, we have not finalized the 2013 proposal. Since then, the private market has only continued to grow. Indeed, in 2019, exempt offerings accounted for approximately $2.7 trillion of new capital, compared to $1.2 trillion in registered offerings.[20] And the SEC has continued to engage in significant rulemaking for private offerings, raising offering limits, relaxing investment limitations, and essentially eliminating our own integration doctrine designed to protect against abuse of the various exemptions from registration.[21] All the while declining to gather data that the Commission previously determined—and history tell us—is  important to evaluating market practices and potential risks to investors.

It is time for the Commission to re-visit the 2013 Regulation D proposal and complete the work of enhancing our visibility into this market. There are a number of important measures presented by the 2013 proposal, and I would very much appreciate the perspective of state regulators on these issues. In my view, some of the most significant items include the following:

  1. Consider conditioning the availability of the Rule 506(c) exemption on the filing of Form D.[22] Because there is no real consequence to issuers for failing to file this form, the rule is viewed by many as optional. In fact, we don’t even know the actual rate of non-compliance, but our own research suggests it may be north of ten percent.[23] And that’s just for those who fail entirely to file the form – it doesn’t purport to encompass those who file inaccurate or incomplete forms. Significant non-compliance means that Form D does not provide a reliable means for regulators to determine whether an issuer advertising an unregistered offering is attempting to comply with Regulation D. Importantly, it also means there exists a significant gap in the data available to us regarding the nature and amount of these offerings. I understand there are legitimate concerns regarding the loss of the exemption (and thus potential rescission of an offering) where there is an inadvertent or good faith oversight with respect to filing a Form D. Those concerns can and should be addressed through the judicious use of waivers.
  2. Consider requiring the filing of Form D in advance of a Rule 506(c) offering and requiring a closing amendment for Rule 506(b) and (c) offerings. The current rule requires filing within 15 days of the first sale. Thus, even if Form D were more reliably filed, the lack of an advance filing requirement means that securities may be advertised, but investors, regulators, and others cannot rely on Form D to assess whether an issuer means to avail itself of a Regulation D exemption. Thus, the current timing of the filing requirement creates obstacles to regulating and analyzing Regulation D offerings. In addition, a simple closing amendment would greatly enhance the information available about capital raising in this market.[24]
  3. Consider requiring additional information to be collected on Form D. Enhancing the information available on Form D, about both issuers and investors, will increase the flow of information to regulators and allow them to better evaluate market practices. Such additional information could include, for example, the number and type of accredited investors who purchased securities in the offering; the amounts raised from any non-accredited investors; the nature of the methods used to verify accredited investor status; the issuer’s website; the issuer’s controls persons; and the type of general solicitation used where applicable.
  4. Consider requiring the use of legends on Rule 506(c) written general solicitation materials and the filing of such materials with the Commission. We should give careful thought to whether requiring legends on advertising materials will better inform investors as to whether they qualify for an offering and the potential risks associated therewith. Requiring the filing of such materials would also allow regulators to better understand how 506(c) is being used and to evaluate the claims made in advertising materials.

If we are truly committed to evidence-based rulemaking, then we must do the work of ensuring that the relevant evidence is available to us. In addition, it’s important to consider that with the rise of digital assets, we are likely to see a growing reliance on 506(c) when new launches of these products involve the sale of securities. I’ve been told by numerous market participants in this space that general solicitation is an absolute requirement for success in such offerings. We cannot afford to allow this blind spot to grow.[25]

I very much value the perspective and expertise of state regulators on this issue, and hope you will continue to work with and advise us as we look to increase visibility into the private markets to ensure we can make data-informed policy decisions going forward. With that, let me reiterate my thanks to NASAA and FINRA for their important partnership with us on these issues. I’m looking forward to today’s discussions.


[1] SEC Division of Examinations, 2021 Examination Priorities (Mar. 2021); FINRA, 2021 Report on FINRA’s Examination and Risk Monitoring Program (Feb. 2021); NASAA, Regulation Best Interest: National Examination Initiative Phase 1 (Sept. 2020).

[2] Commissioner Caroline A. Crenshaw, Mind the (Data) Gaps, Keynote Address at the 8th Annual Conference on Financial Market Regulation (CFMR) (May 14, 2021).

[3] See, e.g., Structured Disclosure at the SEC: History and Rulemaking (“Accessible and usable disclosures are central to the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”); Chair Mary Jo White, Chairman’s Address at SEC Speaks – Beyond Disclosure at the SEC in 2016 (Feb. 19, 2016) (referring to disclosure as “our core authority and lodestar”).

[4] Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results, New York Times (July 8, 2020).

[5] See Brad M. Barber et al., The Cross-section of Speculator Skill: Evidence from Day Trading, 18 J. Fin. Mkts. 1 (2014); Siu-Kai Choy, Retail clientele and option returns, 51 J. Banking & Fin. 26 (2015).

[7] See NASAA 2020 Enforcement Report (“Not surprisingly, state regulators reported numerous instances of misconduct tied to Regulation D private offerings. State securities regulators opened 275 investigations and 144 enforcement actions involving offerings reliant upon the law. This includes 75 investigations and 59 enforcement actions relating to Rule 506(c), which generally permits issuers to publicly advertise unregistered securities so long as they limit sales to accredited investors.”).

[8] See Amending the Accredited Investor Definition, Rel. No. 33-10824 (Aug. 26, 2020).

[9] In other contexts, the Commission has not hesitated to update financial thresholds to account for the passage of time. See, e.g., Modernization of Regulation S-K Items 101, 103, and 105, Rel. No. 33-10825 (Aug. 26, 2020) (effectively increasing the threshold for disclosure of environmental proceedings by ten times); Reporting Threshold for Institutional Asset Managers, Rel. No. 34-89290 (July 10, 2020) (proposing to increase the reporting threshold by 35 times for institutional investment managers that must report equity holdings on Form 13F, thus eliminating visibility into portfolios controlling $2.3 trillion in assets).

[10] See, e.g., Small Business Capital Formation Advisory Committee Recommendation on Accredited Investor (Nov. 12, 2019) (recommending indexing the wealth thresholds to inflation); Staff Report on the Review of the Definition of “Accredited Investor” (Dec. 18, 2015) (recommending indexing for inflation “consistent with the Commission’s approach in its 2007 proposed revisions to the definition, as well as the approach Congress took in the Dodd-Frank Act with respect to the ‘qualified client’ definition and in the JOBS Act with respect to crowdfunding and emerging growth companies.”); see also Letters from the CFA Institute (May 4, 2020); North American Securities Administrators Association (Mar. 16, 2020); Investment Company Institute (Mar. 12, 2020); CrowdCheck (Oct. 30, 2019); and Elisabeth D. de Fontenay, et al. (Sept. 24, 2019) (stating that “inflation undermines the effectiveness of the safeguards built into the Accredited Investor net-worth and income tests”).

[11] 15 U.S.C. 77d-1(h)(1).

[12] 15 U.S.C. 77b(a)(19).

[13] Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Rel. No. 33-10884 (Nov. 2, 2020) (showing Regulation D offerings accounted for approximately 57 percent of total capital raised in the exempt offering market in 2019).

[14] This data deficit was noticeable during the recent rulemaking amending the exempt offering framework. See Commissioner Allison Herren Lee, Statement on Proposed Amendments to the Exempt Offering Framework, at fn. 2 (Mar. 4, 2020) (identifying instances where the release acknowledges limitations on the staff’s ability to analyze the Regulation D market due to the limitations of Form D).

[16] See Rel. No. 33-6949 (July 30, 1992).

[17] See Revisions to Rule 504 of Regulation D, the “Seed Capital” Exemption, Rel. No. 33-7644 (Feb. 25, 1999) (discussing abuses under Rule 504 and reversing the 1992 amendments due to “investor protection” concerns).

[18] See Amendments to Regulation D, Form D, and Rule 156, Rel. No. 33-9416, 1 (July 10, 2013) (“These proposed amendments are intended to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506.”) [hereinafter 2013 Proposal].

[19] See id.

[21] See Rel. No. 33-10884, supra note 12; see also Commissioner Allison Herren Lee, Statement on Amendments to the Exempt Offering Framework (Nov. 2, 2020).

[22] The 2013 Proposal did not include an amendment conditioning the availability of Rule 506(c) on compliance with Form D filing requirements. However, it did include a request for comment on the topic, and the idea was supported by commenters including the Investor Advisory Committee, NASAA, AARP, and the Consumer Federation of America. See 2013 Proposal, supra note 18, at 24.

[23] Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2017, SEC White Paper (Aug. 2018) (“Separate analysis by DERA staff of Form D filings by funds advised by registered investment advisers and broker-dealer members of FINRA suggests that Form D filings are not made for as much as 10% of unregistered offerings eligible for relief under Regulation D.”); see also Vlad Ivanov and Scott Bauguess, Capital Raising in the U.S. The Significance of Unregistered Offerings Using the Regulation D Exemption, SEC White Paper (Feb. 2012) (“Further underestimation may occur to the extent that issuers do not report at all. Rule 503 requires the filing of a notice on Form D for all offerings under Regulation D. However, filing Form D is not a condition to claiming a Regulation D safe harbor or exemption. We understand that some issuers do not file Form Ds for offerings intended to be eligible for relief under Regulation D.”).

[24] Notably, when Regulation D was originally adopted, it required Form D to be updated every six months during the course of an offering. A closing amendment is a modest concession and would significantly increase our ability to evaluate this market.

[25] Indeed the Commission has brought digital assets-related enforcement actions against entities improperly engaging in general solicitation without complying with the terms of Rule 506(c). See, e.g., CoinAlpha Advisors, LLP, Admin. Proc. File No. 3-18913 (Dec. 7, 2018); Crypto Asset Management, LP and Timothy Enneking, Admin. Proc. File No. 3-18740 (Sept. 11, 2018); see also In the Matter of Blockchain of Things, Inc., Waiver Request (Dec. 17, 2019) (“Being constricted to selling its tokens only via the registration process or without the benefits of general solicitation under Section 4(a)(2) of the Securities Act could impose a potentially insurmountable financial burden on BCoT.”). Moreover, while 506(c) offerings represent a smaller segment of the Regulation D market (approximately four percent of Regulation D capital raised in 2019), they represent a disproportionate number of the enforcement actions reported by state regulators (approximately 31 percent of investigations and enforcement actions reported in 2019). See Rel. No. 33-10884, supra note 13; NASAA 2020 Enforcement Report, supra note 7.

These remarks were delivered on May 21, 2021, by Allison Herren Lee, commissioner of the U.S. Securities and Exchange Commission, at the 2021 Section 19(d) Conference in Washington, D.C.