On July 10, 2013, the Securities and Exchange Commission:
Approved final rules eliminating the prohibition against general solicitation and general advertising in connection with certain private offers and sales of securities in which sales are made exclusively to accredited investors, conducted in reliance on Rule 506 of Regulation D under the Securities Act of 1933
Approved final rules disqualifying securities offerings from relying on Rule 506 if they involve certain felons or other “bad actors”
Proposed rules requiring issuers making offerings under amended Rule 506 to make additional Form D filings, add certain legends to marketing materials and submit marketing materials to the SEC and amending Form D to add further information about such offerings.
These rules are likely to significantly affect the way private securities offerings are conducted in the United States. The major changes made by the new rules are summarized below.
General Solicitation in Rule 506 Offerings
Most importantly, the SEC adopted new rules, effective September 23, 2013, permitting general solicitation and advertising for certain offerings made pursuant to Rule 506, as mandated by the JOBS Act. By allowing advertising of offerings, the new rules may make it easier for a company to find investors.
The new rules amend Rule 506 of Regulation D by adding a new paragraph 506(c), which permits issuers to use general solicitation and general advertising in offerings made in reliance on the rule. The current Rule 506 remains in place (as paragraph 506(b)) as an alternative, allowing issuers to conduct Rule 506 offerings, which may include a limited number of non-accredited investors, subject to the prohibition on general solicitation and general advertising.
In relying on 506(c) to make an offering, issuers must:
Take reasonable steps to verify that all purchasers are accredited investors
Sell the offered securities only to accredited investors
Comply with the Regulation D definitions in Rule 501 and the general conditions of Rule 502(a) (relating to the integration of multiple offers) and Rule 502(d) (restricting resales of securities sold in reliance on Regulation D)
Identify the offering as made in reliance on 506(c) in any Form D filed
In verifying the accreditation of investors to comply with 506(c), it will not be sufficient to rely solely on an investor’s representation that the investor is an accredited investor. Rule 506(c) does not otherwise mandate any specific requirements as to what constitutes “reasonable steps to verify” that investors are accredited investors. Instead, 506(c) provides that the determination of the reasonableness of the steps taken is an objective assessment by the issuer, considering the facts and circumstances of the investor and the transaction. Rule 506(c) also includes a non-exclusive list of methods that issuers may use to verify that a natural person investor is an accredited investor. The SEC emphasized the non-exclusive nature of the list in new rules’ adopting release.
Bad Actor Disqualifications
At the same time as it adopted the new rules allowing general solicitation in Rule 506 offerings, the SEC also adopted new rules to prohibit participation by “bad actors” in Rule 506 offerings, including offerings using general solicitation under new Rule 506(c). Under the new rules, an issuer will not be able to rely on Rule 506 if certain individuals or entities (including the issuer itself, shareholders holding at least 20% of outstanding stock, and directors and officers who participate in the offering) have been subject to a disqualifying event such as a conviction for securities fraud. Triggering events that occurred before the effectiveness of the new rules will not count, though they will be subject to mandatory disclosure. Those new rules are also effective September 23, 2013.
The SEC also proposed new rules relating to private offering in connection with adopting the new rules described above. The proposed rules would require issuers relying on Rule 506(c) to file a Form D no later than 15 calendar days before conducting any general solicitation activities; currently, a Form D must be filed no later than 15 days after the first sale. In addition, any issuer relying on Rule 506 would be required to amend its Form D no later than 30 calendar days after the termination of the offering to state that the offering was closed. The proposed rules also would expand the information required to be provided on Form D, including, for Rule 506(c) offerings, the types of general solicitation used and the methods used to verify the accredited investor status of purchasers. The SEC also proposed an amendment to Rule 507 that would disqualify issuers that did not comply with the Form D filing requirements within the preceding five years from using Rule 506 until one year after the required Form D filing(s) are made.
In addition, the SEC proposed a new Rule 509 to require legends in any written general solicitation materials used in an offering relying on Rule 506(c) and additional disclosures for private funds if such materials include performance data. The SEC also proposed to extend to the sales literature of private funds the guidance contained in Rule 156, currently applicable only to investment companies, which addresses when information in sales literature could be fraudulent or misleading for purposes of the federal securities laws. Finally, the SEC proposed a new temporary Rule 510T that would require, for the two years following its adoption, that issuers relying on Rule 506(c) submit soliciting materials to the SEC no later than the date of first use of such materials.
For more information, contact Benjamin Alexander.