On July 10, 2013, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 506 of Regulation D as mandated by Section 2 of the JOBS Act signed into law in April, 2012. The new amendments created a new “Rule 506(c)” exemption that allows private companies to utilize general solicitations and advertising to the general public in the promotion of the sale of securities under certain conditions.
Under this new Rule 506(c) exemption, even though the issuer’s general solicitation and advertising may reach the general public, the issuer may only actually sell securities to “accredited investors” (meeting certain wealth or income criteria under Regulation D). Additionally, the issuer must take reasonable steps to verify that all purchasers are actually “accredited investors.” The final rule adopted by the SEC does not require specific methods for this verification, but does provide several non-exclusive methods that issuers may use to verify “accredited investor” status.
In creating this new Rule 506(c) exemption, the SEC also released proposed rules to address concerns that lifting the ban on general solicitation would create risks for investors. Under the proposed rules, the SEC would impose the expanded filing requirements in connection with a Rule 506(c) offering:
- Issuers would be required a Form D filing at least 15 days prior to any general solicitation, and later file an amendment after the offering has been completed.
- Issuers’ disclosure obligations would be expanded. In particular, issuers would be required to submit all general solicitation and advertising materials to the SEC on a confidential basis, and all such materials would be required to include specified legends and other disclosures.
- A failure to file a Form D would preclude the issuer and its affiliates from relying on Rule 506(c) for one year.
The final rules will become effective 60 days after publication in the Federal Register. Comments on the proposed rules will be due 60 days after publication in the Federal Register. We will follow-up with additional information after the proposed rules become final.