SEC Proposes Regulatory Changes to Accommodate General Solicitation and General Advertising in Connection With Certain Private Offerings

On August 29, 2012, SEC staff proposed for public comment regulations designed to accommodate a provision under Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act) eliminating the prohibition on general solicitation and general advertising for certain offerings under Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933, as amended (See Release No. 33-9354).

The easing of the restrictions under Rule 506 is intended for offerings that are sold exclusively to “accredited investors” as that term is defined under Rule 501 of Regulation D. With respect to Rule 144A offerings, purchasers may only be “qualified institutional buyers” (QIBs) but offers could be made, under the proposed regulations, to virtually any person.

The SEC has proposed new Rule 506(c) under Regulation D to provide that the prohibitions on general solicitation and general advertising shall not apply to Rule 506 offerings where all of the purchasers are accredited investors and the issuer has taken reasonable steps to verify that each purchaser is an accredited investor. The proposed rule does not specify how the issuer must conduct the verification process. The staff decided not to specify the verification process due to the varied type of investors and tests under Rule 501 in qualifying as an accredited investor. The staff has proposed that issuers may continue to rely on Rule 506 without use of general solicitation and general advertising by having a reasonable belief that investors are accredited at the time of purchase, which is the current requirement under Rule 506.

The staff also proposed that Form D be revised to include a box to check if the issuer will use general solicitation or general advertising in connection with the subject offering.

The staff proposed that the issuer may want to consider the following factors when determining the reasonableness of the steps to verify that a purchaser is an accredited investor:

  • The nature of the purchaser and type of accredited investor that the purchaser claims to be
  • The amount and type of information that the issuer has about the purchaser
  • The nature of the offering, such as the manner in which the purchaser was solicited to purchase, and the terms of the offering, such as a minimum investment amount

The staff further elaborates within the Release on each of the factors described above.

The staff also cited that the proposed amendments to the regulations should not affect the Regulation S exemption for offers and sales conducted by a U.S. issuer to persons located outside of the United States. The staff has proposed that Rule 144A be revised to require the sellers relying upon this exemption to take reasonable steps to determine that each purchaser is a QIB.

Noteworthy, not included within the staff’s proposal, although suggested by certain “pro-consumer” advocates, that the filing of Form D be a requirement to secure the exemption. Under the current rules, and unaltered under the proposed revisions, the failure to file Form D does not disallow the use of the exemption.

Critics (including some of the Commission’s own members) of the SEC’s handling of the rulemaking process under Rule 506 cite that Congress intended for the SEC to have rules in place by 90 days from the enactment of the JOBS Act (i.e., by July 5, 2012). They criticize the SEC for dragging its feet as this recent proposal further delays the process. Such critics contend that the staff should have released an interim final rule by the 90-day period so that a rule (although temporary) would have been in place and issuers could be utilizing the benefits under Rule 506 Congress intended through the JOBS Act. SEC Commissioner Mary Shapiro, during the August 28, 2012 public meeting, defended the staff’s deliberate response and stated that she believes that “interim final rules” is not a process that provides sufficient public input in the rulemaking process.

The staff apparently is considering the formation of an internal task force to monitor the conduct of private placement offerings once this proposed regulation is in place to determine the effects of general solicitation and general advertising in connection with such offerings.

The staff will accept public comments to the proposed revisions for a period of 30 days from the date of their publication. After that process has been completed, it is expected that a final rule will be effective sometime in late fall of 2012. Issuers and other sellers of securities under Rule 506 and Rule 144A are reminded not to conduct general solicitation or general advertising in connection with such offerings until the final rule is in place.