The fidelity of transcription initiation is essential for accurate gene expression, but the determinants of start site selection are not fully understood. Rap1 and other general regulatory factors (GRFs) control the expression of many genes in yeast. We show that depletion of these factors induces widespread ectopic transcription initiation within promoters. This generates many novel non-coding RNAs and transcript isoforms with diverse stability, drastically altering the coding potential of the transcriptome. Ectopic transcription initiation strongly correlates with altered nucleosome positioning. We provide evidence that Rap1 can suppress ectopic initiation by a "place-holder" mechanism whereby it physically occludes inappropriate sites for pre-initiation complex formation. These results reveal an essential role for GRFs in the fidelity of transcription initiation and in the suppression of pervasive transcription, profoundly redefining current models for their function. They have important implications for the mechanism of transcription initiation and the control of gene expression.