On August 29, 2012, and as mandated by the Jumpstart Our Business Startups Act (the JOBS Act), the SEC issued for comment proposed amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 via Release No. 33-9354 (the Release), to implement Section 201(a) of the JOBS Act. The Release can be found at http://www.sec.gov/rules/proposed/2012/33-9354.pdf.
Rule 506 Amendment
The proposed amendment to Rule 506 would lift the prohibition against general solicitation and general advertising contained in Rule 502(c) of Regulation D with regard to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors, either because they come within the applicable definition or the issuer reasonably believes that they do.
The proposed amendment to Rule 506 would also require that, in Rule 506 offerings that use general solicitation and general advertising, the issuer take reasonable steps to verify that purchasers of the securities are accredited investors. Whether the steps taken are reasonable would be an objective determination, based on the particular facts and circumstances or each transaction. Issuers are to consider a number of factors when determining the reasonableness of such steps, 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, and the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering.
- The terms of the offering, such as a minimum investment amount.
Further detail on how this determination should be made is set forth in the Release. Issuers should retain adequate records of their verification process.
Rule 506 offerings utilizing general solicitation or general advertising would not be subject to the informational requirements in Rule 502(b) because all purchasers in such offerings would be accredited investors. In addition, privately offered funds would be permitted to make an offering utilizing a general solicitation or general advertisement under amended Rule 506 without losing either of the exclusions under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. The proposed amendment, however, would not affect FINRA’s broker-dealer rules regarding communications with the public. The SEC is proposing to retain the safe harbor under existing Rule 506 for issuers that wish to conduct Rule 506 offerings without the use of general solicitation.
The SEC is also proposing to revise Form D to add a separate check box for issuers to indicate whether they are using general solicitation or general advertising in a Rule 506 offering.
Rule 144A Amendment
The proposed amendment to Rule 144A(d)(1) would allow securities to be offered pursuant to Rule 144A to persons other than qualified institutional buyers, including by means of general solicitation and general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are qualified institutional buyers.
Consistent with the historical treatment of current Regulation S and Rule 144A/Rule 506 offerings, concurrent offshore and domestic offerings that are conducted in compliance with Regulation S and Rule 506 or Rule 144A, as proposed to be amended, would not be integrated.
The proposed amendments are subject to a 30-day comment period.