SEC Issues Proposed Rules To Lift Ban On General Solicitation and Advertising in Private Securities Offerings
August 30, 2012 -
On August 29, 2012, the U.S. Securities and Exchange Commission (SEC) published proposed rules mandated by Congress that would eliminate the ban on general solicitation and advertising for private securities offerings made to qualifying investors pursuant to SEC Rule 506 of Regulation D under the Securities Act of 1933. The Jumpstart Our Business Startups (JOBS) Act, signed into law in April 2012, directed the SEC to remove the general solicitation and advertising prohibition currently in place for private offerings relying on Rule 506 provided that all purchasers of the securities are “accredited investors.” Although the JOBS Act called for the SEC to have rules in place within 90 days of enactment, the Commission determined instead to publish proposed rules for comment, and thus delay adoption pending completion of the comment process. A 30-day comment period has been established before further action by the SEC.
Proposed amendments to Rule 506 provide that the current prohibition against general solicitation and general advertising would not apply to offers and sales under the Rule provided that all purchasers of the securities are accredited investors, and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Including a “reasonable steps to verify” condition for sales to accredited investors under Rule 506 significantly expands the existing “reasonable belief” standard which issuers in these private offerings have been held in regard to determining accredited investor status. The proposed amendments to Rule 506 do not prescribe any specific or sufficient action to be taken. Rather, in the proposing Release, the SEC notes that whether steps taken are reasonable would be an objective determination, based on the particular facts and circumstances of each transaction. With the new verification requirement in place, however, issuers must plan on documenting whatever steps are taken to verify that a purchaser is an accredited investor.
As also required by the JOBS Act, the SEC has proposed a revised Rule 144A, which covers private resales of securities to “qualified institutional buyers.” As with Rule 506, Congress mandated that Rule 144A offerings may be carried out with general solicitation and advertising, provided all purchasers are reasonably believed to be qualified institutional buyers. Unlike revised Rule 506, however, there is no verification requirement.
Robert N. Rapp, a partner in Calfee’s Securities and Capital Markets group, discusses the broad impact of the JOBS Act on capital formation and the important regulatory changes that have come with it.