OPEN MEETING STATEMENT BY SEC COMMISSIONER AGUILAR

Statement at Open Meeting
by
Commissioner Luis A. Aguilar

FROM:  U.S. SECURITIES AND EXCHANG COMMISSION  
U.S. Securities and Exchange Commission
Open Meeting
Washington, D.C.
July 10, 2013

Today the Commission votes on a proposal (the “Proposing Release”) that contains a number of changes which would help protect investors and provide the Commission with information it needs to advance its regulatory, oversight, and enforcement functions.

More specifically, the Proposing Release would amend Regulation D to improve the content and timeliness of the Form D notice filing and to require legends and other disclosures in written materials disseminated in offerings utilizing general solicitation. The proposal would also amend Rule 156 to extend certain antifraud guidance to the sales literature of private funds, and would add new Rule 510T to require, on a temporary basis, the submission of written general solicitation materials to the Commission no later than the date of first use of such materials.

The Proposing Release follows the Commission’s adoption of rule amendments to implement Section 201 of the JOBS Act by removing the prohibition on general solicitation in certain exempt offerings (the “General Solicitation Rule”).1

The Proposing Release is intended to address some of the concerns that many commenters have raised regarding general solicitation, including concerns regarding an increase in fraudulent activity, as well as to improve the Commission’s ability to evaluate the development of market practices in Rule 506 offerings.

Although I support the Proposing Release, I would like to emphasize that this proposal is not a “quick fix” to the problems associated with the way the majority of the Commission has decided to implement general solicitation. Nor does this proposal rectify the Commission’s failure to consider commenters’ recommendations in connection with the original proposal of the General Solicitation Rule, or its failure to repropose that rule, so that such recommendations could be taken into account concurrently with the rule’s adoption. As I have said before, I’m afraid that any protections resulting from today’s proposal will come too late, if they come at all, for many investors.

It is ironic that the Proposing Release describes a work plan developed by the Commission staff to monitor, review, and analyze the use of Rule 506(c), including monitoring the Rule 506(c) market for indications of fraud. While I appreciate any effort by the staff to better inform our rulemaking and enforcement efforts, I am struck by the fact that the need for such a work plan is simply further confirmation that the General Solicitation Rule adopted today fails to address the risks to investors arising from the faulty process followed in implementing Section 201 of the JOBS Act.

I hope that the Regulation D enhancements we propose today — as well as needed improvements to the definition of accredited investor — will be adopted promptly. Investors should not be at risk any longer than is necessary.

Before I conclude, I would like to thank the staff who worked on the Proposing Release. I appreciate your efforts.

1 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Facilitating General Solicitation at the Expense of Investors,” Statement at SEC Open Meeting (July 10, 2013). I also recognize the Commission action today to adopt rule amendments to implement Section 926 of the Dodd-Frank Act by disqualifying certain felons and “bad actors” from offerings under Rule 506, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Limiting — But Not Eliminating — Bad Actors from Certain Offerings,” Statement at SEC Open Meeting (July 10, 2013).

SEC CHARGES REAL ESTATE INVESTMENT COMPANY AND ITS PRINCIPALS WITH OFFERING FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
On July 6, 2012 the Securities and Exchange Commission filed a Complaint in federal district court against The Companies (TC), LLC ("The Companies") and its principals, Kristoffer A. Krohn ("Kris Krohn"), Stephen R. Earl ("Earl"), and former officer, Michael K. Krohn ("Mike Krohn") (collectively "Defendants").

The Companies, directly and through related companies and subsidiaries, purchases distressed real estate for investment. The Complaint alleges that to raise money to purchase real estate, The Companies or its subsidiary, Alpha Real Estate Holdings, L.P. ("Alpha LP"), initiated four unregistered offerings of securities from January 2009 to June 2011. Kris Krohn, Earl, and Mike Krohn participated in the offerings by providing content for and approval of the private placement memoranda ("PPMs") used to solicit investors and by directly offering the securities to investors. The four offerings raised a total of approximately $11.9 million from approximately 169 investors. The PPMs contained material misrepresentations and omissions related to, among other things, the value of properties to be purchased or that were owned by the Companies or Alpha LP.

In addition to containing false representations, each of the four offerings relied on the exemption to registration under Regulation D, Rule 506. The offerings did not qualify for the Rule 506 exemption because Defendants solicited investors through general solicitation at meetings that were open to the public.

The Defendants consented to entry of judgments against them without admitting or denying the allegations in the SEC’s complaint. Each of the Defendants consented to a judgment permanently enjoining them from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933. In addition, The Companies agreed to undertake to inform all investors in writing of the final judgment, provide audited financial statements, and offer return of consideration for investors who choose to return their securities to The Companies after receiving the written disclosures. Kris Krohn, Mike Krohn, and Earl have also agreed to pay civil monetary penalties of $75,000 each.

The SEC’s investigation was conducted by Cheryl Mori and Justin Sutherland; the litigation will be led by Dan Wadley and Tom Melton.