SEC Proposed Amendments to Permit General Solicitation and Advertising in Private Placements
SUMMARY OF PROPOSED RULES
On August 29, 2012, the Securities and Exchange Commission (the “SEC”) proposed several amendments to Regulation D and Rule 144A under the Securities Act of 1933, (the "Securities Act") which, if adopted, would eliminate, subject to certain conditions, the existing prohibition on general solicitation and general advertising as set forth in Rule 506 of the Securities Act, and clarify that there is no ban on general solicitation in offerings made pursuant to Rule 144A. These proposed amendments, if adopted, will significantly change the manner in which issuers of securities can raise investor capital in a "private placement" and without making a public offering registered under the Securities Act. Pursuant to Section 201(a) of the Jumpstart Our Business Startups Act, which was signed into law earlier this year (the "JOBS Act"), the SEC was directed to eliminate the restrictions against general solicitation or general advertising in exempt offerings made in reliance upon Rule 506 and Rule 144A. The proposed amendments modify only the regulatory "safe harbor" provided by Rule 506 (and not the broader private placement exemption provided by Section 4(a)(2) of the Securities Act), and would not affect an issuer's existing ability to conduct Rule 506 offerings without using general solicitation.
At the present time, an issuer that engages in a private placement of its securities pursuant to the private placement exemption under the Securities Act, including Rule 506 of Regulation D is prohibited from using “any form of general solicitation or general advertising” when conducting an unregistered offering of its securities. This restriction in the "manner of the offering" is generally interpreted broadly and prohibits, among other things, the use of publicly available websites, media broadcasts (such as radio and television advertisements), mass email campaigns, and/or public seminars or meetings as part of an issuer’s capital raising activities. However, to fulfill the requirement imposed by the JOBS Act, the SEC’s proposal would amend Rule 506 by adding Rule 506(c), to permit the use of general solicitation in connection with an offering of securities, provided that: (1) all purchasers of securities in such offering are “accredited investors,” as defined in Rule 501(a) of Regulation D; (2) the issuer in such offering takes reasonable steps to verify that all purchasers of the securities are accredited investors; and (3) all terms and conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied.
Proposed Rule 506(c) does not specify uniform verification methods to determine whether an issuer has taken reasonable steps to verify that purchasers of securities are accredited investors, but instead provides that such a determination would be objective, based on the facts and circumstances of each particular transaction, and would take into account a number of factors including:
- the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
- the amount and type of information that the issuer has about the purchaser (which may include publicly available information); and
- the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
The SEC's release, which accompanies the proposed amendments, explains that solicitations of new investors through a generally-accessible website or a broadly disseminated email or social media platform likely would require an issuer to take greater steps to verify accredited investor status than solicitations of new investors from a database of pre-screened accredited investors set-up and maintained by a reasonably reliable third-party, like a registered broker-dealer. With respect to the former, an issuer would not have taken reasonable steps to verify that a person is an accredited investor simply by requiring that such person check a box in a questionnaire or sign a form, without other supporting information indicating that such person is an accredited investor. Conversely, an issuer that has a reasonable basis to rely on a third-party's verification of a person's status as an accredited investor would be entitled to rely on such verification. A required minimum investment amount would be an example of an offering term that also may be relevant in this analysis. If the minimum investment is high enough such that only accredited investors could reasonably be expected to afford such investment, the SEC indicated that it may be reasonable for the issuer to take no further steps other than to confirm that neither the issuer nor another third party is financing such investment. The SEC's release states that it would be important for issuers to retain sufficient records which document the steps taken to verify that a purchaser of its securities was an accredited investor, regardless of the particular steps it took, and that if an issuer claims the new exemption, it would have the burden of showing that it is entitled to the exemption.
The SEC has requested comments on the proposed amendments by October 5, 2012, which creates the possibility that final amendments could be adopted by year-end. However, the timing for the adoption of final amendments remains unclear. It is important to note that until final amendments are adopted and made effective, general solicitation is not permitted in connection with Rule 506 and Rule 144A securities offerings. Once adopted and effective, the amendments would allow the use of general solicitation to reach a broader audience of potential investors, subject to certain conditions.
We will continue to monitor this proposal and provide updates as appropriate. Please feel free to contact Susan Burke (312 261 2120), or David Diamond (312 261 2174) with questions or comments.
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