PRIVATE PLACEMENTS: A REGULATORY BLACK HOLE

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, 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. This article proposes a return to state supervision of designated private placements.