At an open meeting this morning, the Securities and Exchange Commission approved final rules implementing one of the most important changes to securities regulation and offering practices in decades: to allow the use of general solicitation or advertising in offerings to accredited investors that are exempt from registration under Rule 506 of Regulation D under the Securities Act of 1933. The Commission also adopted final rules disqualifying “bad actors” from relying on the exemption provided by Rule 506 and approved for publication a series of proposed rules to enhance its ability to monitor offerings. Neither the final rules nor the proposed rules have been published, and we will update this alert when the additional detail from the published regulations is available.
The most important action taken by the Commission was to authorize the issuance of an adopting release on final rule amendments allowing general solicitation in offerings to accredited investors that comply with Rule 506 of Regulation D, as mandated by Congress in the Jumpstart Our Business Startups ("JOBS") Act. The final rule, like the rule proposed on August 29, 2012, will require the issuer to apply a principles based approach in taking “reasonable steps to verify that purchasers are accredited investors,” but will also include a nonexclusive list of methods to verify the accredited status of an individual purchaser. The Commission did not indicate when the final rule would be published or would be effective. The rule was adopted on a 4-to-1 vote, with Commissioner Aguilar voting against the rule amendments for the reasons discussed by numerous commentators and state regulators.
The Commission also authorized the issuance of an adopting release on final rule amendments that would disqualify felons and "bad actors" from relying on Rule 506. The Commission described a number of changes to the rule that was proposed on May 25, 2011, including changes that would limit its application to directors and executive officers (rather than all officers) of an issuer and to shareholders who hold 20% of the voting power of an issuer (rather than 10% of the beneficial ownership) and would expand its application to investment managers and principals of pooled investment funds. The final rule will also expand the definition of “bad actors” to include persons who are subject to a court order or cease and desist order under Section 5 of the Securities Act, or subject to similar action by the CFTC. This rule was adopted unanimously, but with Commissioner Aguilar complaining about the prospective application of the rule: that it applies only to persons who become "bad actors" after the rule is adopted.
The Commission also proposed rule amendments (not effective) that would:
- Amend Rule 503 (which requires the filing of a Form D) to require issuers relying on Rule 506(c) (offerings using general solicitation) to file a Form D fifteen days before commencement of such an offering;
- Amend Rule 503 to require an issuer to file a final Form D within 30 days after termination of such an offering;
- Revise Form D to (i) add expanded disclosure regarding the issuer, the offering and the use of proceeds and (ii) require issuers relying on Rule 506(c) to identify the methods of general solicitation used and the methods used to verify status of accredited investors;
- Amend Rule 507 to disqualify issuers from being able to rely on Rule 506(c) for a period of five years if they fail to timely file a Form D under Rule 503, but with some ability to cure late filings;
- Add a new Rule 509 to require that general solicitation materials used in 506(c) offerings contain specific cautionary language;
- Amend Rule 156 (which provides limitations on solicitation materials used by investment companies) to provide that Rule 156 also applies to private funds;
- Amend Rule 506(c) to provide that the issuer must submit written general solicitation materials to the Commission on an electronic basis, that are not available for public inspection (the rule would lapse two years after adopted and is proposed so that the SEC can monitor disclosure practices); and
- Request comments on the definition of “accredited investor.”
These proposed rules were approved by a 3-to-2 vote, with Commissioners Paredes and Gallagher dissenting because of the negative impact of the proposed rules on capital raising.
The Commission has been prompt in publishing adopted rule releases, and we expect to be in a position to provide additional detail within the next week.