Private Placements: A Regulatory Black Hole

48 Pages Posted: 25 Feb 2010

Multiple version iconThere are 2 versions of this paper

Date Written: February 22, 2010


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, Congress in 1996 preempted state authority, thus creating a situation in which suspect investment schemes can proliferate below any governmental radar screen. This article questions the continued wisdom of this regulatory vacuum, especially in light of recent financial events.

This article reviews the legislative history of this preemptive statute, the National Securities Markets Improvements Act of 1996 (NSMIA), and concludes that the preemption of private placements either resulted from congressional misconceptions, back room politics arising from the conservative deregulatory agenda of the decade, or both. After analyzing the regulations and the private placement market as it existed in 1996, and as it operates today, the article concludes that NSMIA's cogent preemptive force primarily impacts state authority over the smaller, most risky private placements. Combined with the lack of federal oversight, this statutory preemption creates 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. This article proposes a return to state 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.

Keywords: Delaware, Journal, Corporate, Law, rule 506, NSMIA, preempt, private, securities, transactions

Suggested Citation

Johnson, Jennifer J., Private Placements: A Regulatory Black Hole (February 22, 2010). Delaware Journal of Corporate Law (DJCL), Vol. 35, No. 1, 2010. Available at SSRN:

Jennifer J. Johnson (Contact Author)

Lewis & Clark Law School ( email )

10015 S.W. Terwilliger Blvd.
Portland, OR 97219
United States

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