When the Securities and Exchange Commission last week approved a proposed rule to eliminate the current prohibition against general solicitation and advertising for private securities offerings, the move was applauded by those in the financial community who saw the move as long overdue.

The proposed exemptions, mandated by the JOBS Act, focus on amendments to Rule 506 of Regulation D. On Aug, 29, the Commission voted 4-1 to issue a proposed rule, opening up a public comment period rather than the immediate implementation of an interim rule.

Consumer and investor advocates, although initially pleased by the decision to forgo an interim rule, have little else good to say about the proposed rule as written.

“Let the scams begin,” is how the group Public Citizen announced the vote.

“If a proposal issued today by the SEC is adopted, financial speculators looking to make a quick buck may soon be able to advertise high risk, shady deals to the public with the blessing of the federal government,” said Bartlett Naylor, Financial Policy Advocate for Public Citizen's Congress Watch Division.

“One of the very few investor safeguards from Congress is the requirement that firms offering private securities have to take “reasonable steps” to ensure that the investor is sophisticated and has a net worth of $1 million or $200,000 in annual income,” he said. “The SEC's proposed rule fails to adequately define these ‘reasonable steps' a hedge fund is required to take before it can categorize a prospective client as sophisticated. This is a grave oversight.”

“While the JOBS Act requires the SEC to lift the solicitation ban, it does nothing to lessen the SEC's duty to ensure that investors are adequately protected in private offerings,” Americans for Financial Reform and Consumer Federation of America said in a joint statement, adding that “the proposal they approved does not meet even that most basic test.”

They too took issue with what was called the lack of “any meaningful ‘reasonable steps' to ensure that purchasers are accredited investors, as specifically required by the statute.”

Another their complaints were that the rule proposal would not ensure the filing of Form D as a condition of relying on the exemption and engaging in general solicitation. Nor would it require issuers to submit information on their planned advertising and solicitation practices and verification procedures. “These are basic steps that would help provide regulators with the ability to police this troubled market,” the groups said.

Many of the concerns raised by these organizations were shared by SEC Commissioner Luis Aguilar, the lone vote against the proposed rule. In a written statement, he lamented that there was "no consideration of any of the commenters' proposals that would have decreased investor vulnerability.”

Guidance Aguilar says should have been considered, and still could be during the public comment period:

The Commission could require any advertising under the amended rule to comply with guidance similar to that applicable to advertising for registered offerings, including a ‘balanced presentation of risks and rewards.'”

Mandatory “cooling-off” periods, within which investors could terminate a purchase without risk.

“Warning labels” highlighting the risks of investing in unregistered securities.

Tightened integration rules, so that general solicitation or advertising for one offering could not be used to condition the market or pump up the stock price for another offering.

“History shows that, when stock promoters are allowed to advertise and solicit the public without any sort of registration or qualification whatsoever, it opens the door to fraudsters and scam artists of every description,” Aguilar wrote. “Currently, general solicitation accompanying a private placement is a clear red flag and jumpstarts an investigation. Going forward, this red flag would be removed, putting investors even more at risk. The proposal fails even to make an attempt to address this yawning gap by improving the content, timing, and compliance of, and with, the Form D Notice Filing.”