SEC Adopts Rules Allowing for General Solicitation and Advertising for Private Offerings under JOBS Act.
On July 10, 2013, the Securities and Exchange Commission ("SEC"): (1) voted to eliminate the prohibition on general solicitation and advertising for certain private securities offerings (the "Final General Solicitation Rules"); (2) adopted "bad actor" provisions, disqualifying companies and funds from participating in such solicitation and advertising if felons and other "bad actors" participate in the offering (the "Final Bad Actor Rules"); and (3) proposed amendments to enhance investor protection measures (the "Proposals"), which, if passed, would require that issuers provide additional information about these securities offerings. Background:
The Final General Solicitation Rules and the Final Bad Actor Rules (collectively, the "Final Rules") will become effective 60 days after publication in the Federal Register. The Proposals are subject to a 60 day public comment period following publication in the Federal Register. Elimination of Prohibition on General Solicitation and General Advertising
Under the Final Rules, the SEC adopted Rule 506(c) of Regulation D ("Rule 506"), which allows for issuers to use general solicitation and advertising to offer securities, provided that the issuer takes reasonable steps to verify that all purchasers are "accredited investors" as defined in Rule 501 of Regulation D.
The SEC published a non-exclusive list of methods issuers may use to satisfy the verification requirement, including:
• Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year. • Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.
Issuers claiming the 506(c) exemption will now need to check a box on the Form D to indicate as such.
Notably, the SEC maintained the Rule 506 exemption (re-designated as Rule 506(b)) which allows for the sale of private offerings to up to 35 non-accredited investors and an unlimited number of accredited investors with whom there is a pre-existing and substantial relationship. Investors in connection with offerings conducted pursuant to Rule 506(b) will not be subject to the heightened verification requirements.
The SEC also eliminated the references to "offer" and "offerree" from Rule 144A of the Securities Act of 1933, as amended ("Securities Act") allowing securities sold pursuant to Rule 144A to be offered to persons other than qualified institutional buyers ("QIBs"). Such resales can be made using general solicitation and advertising, so long as the securities are sold to a QIB or to a person that the seller reasonably believes is a QIB.
Bad Actor Provisions
The SEC adopted rules that were proposed in May 2011, designed to disqualify certain felons and "bad actors" from relying on Rule 506. Simply put, if a "bad actor" is subject to a "disqualifying event", they will be disqualified from relying on Rule 506. The SEC expanded the list of potential "bad actors" from the May 2011 proposal to include investment managers and principals of pooled investment funds. "Disqualifying events" were modified and now include federal and state securities law violations, particularly violations of Section 5 of the Securities Act and breaches of banking or insurance laws, credit union regulations and commodity rules. Notably, disqualification will not arise as a result of events that occurred before the effective date of the Final Rules. However, while not disqualifying, such events are subject to mandatory disclosure requirements.
Investor Protection Proposal
In addition to the above-described rules, the SEC proposed amendments to Regulation D, Form D and Rule 156 under the Securities Act to enhance its ability to "evaluate changes in the market and to address the development of practices in Rule 506(c) offerings."
The proposed changes include:
• Providing a description of the type of general solicitation used and the methods used to verify "accredited investor" status on Form D; • Filing Form D within 15 days before a general solicitation begins; • Filing an amendment to Form D within 30 days after completion of the offering; • Including a legend in offering materials for generally solicited deals; • Submitting all offering materials to the SEC for review and analysis (for a period of two years); • Applying the Rule 156 sales literature requirements for public funds to generally solicited offerings by private funds (particularly if offering materials contain performance information); and • Barring the use of 506(c) if the issuer failed to comply with Rule 506 requirements within the past five years (with a cure period for late filings and waiver for good cause).
Additionally, in furtherance of these changes, the SEC also indicated that it is in the process of reviewing the accredited investor standard and anticipates further modifications.
As a reminder, the Final Rules will not become effective until 60 days after publication in the Federal Register. Further, we caution that although the Final General Solicitation Rules have eliminated the ban on general solicitations and advertisements, there remains significant uncertainty as to the interpretation of the Final Rules. We anticipate that various regulators will interpret the Final Rules as narrowly as possible to provide for the maximum protection for investors. Moreover, the Final Rules could conflict with other regulatory regimes, such as the Commodity Futures Trading Commission and various state laws. As such, before engaging in a general solicitation or advertisement, private fund managers should act with an abundance of caution and contact us for an assessment of such activities.