In a previous client alert we discussed rules proposed in August 2012 by the Securities and Exchange Commission (“Commission”) to allow for general solicitation, or public advertising, in private securities offerings conducted pursuant to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933. On July 10, 2013, the Commission adopted final rules to eliminate the ban on general solicitation in offerings pursuant to Rules 506 and 144A. In addition, the Commission adopted final rules to prohibit certain “bad actors” from participating in Rule 506 offerings and proposed rules that would impose additional requirements on issuers conducting Rule 506 offerings.

Highlights of the SEC’s Final and Proposed Rules

General solicitation is now permitted in Rule 506 and Rule 144A securities offerings.

A new provision (Rule 506(c)) was added to allow issuers to use general solicitation to offer securities in Rule 506 offerings. Certain terms and conditions of traditional Rule 506 offerings still apply (e.g., offerings are subject to integration limitations and securities issued will be subject to resale limitations).

In Rule 506 offerings that use general solicitation, issuers will need to take reasonable steps to verify that purchasers are accredited investors. These steps may include:

  • Verifying income on IRS reports;
  • Verifying net worth with bank statements, brokerage statements, tax reports, credit reports, etc.; and
  • Obtaining certification from a broker-dealer, investment adviser, attorney, or CPA.

Sellers in Rule 144A offerings may make offers through general solicitation as long as the securities are sold only to persons whom the seller reasonably believes to be a qualified institutional buyer (QIB).

Private funds may engage in general solicitation in compliance with the new rules without losing important exclusions under the Investment Company Act of 1940 but the Commission warned private funds to implement appropriate policies and procedures regarding general solicitation.

The Commission proposed amendments to its rules that would affect issuers who conduct Rule 506 offerings.

Proposed amendments would require:

  • Issuers to file a modified Form D no later than 15 calendar days in advance of using general solicitation in a Rule 506 offering and to file a closing Form D amendment no later than 30 calendar days after the termination of a Rule 506 offering;
  • Legends on general solicitation materials;
  • The disqualification from using Rule 506 in any new offering for one year if the issuer or an affiliate did not comply, in the past five years, with Form D filing requirements in Rule 506; and
  • Private funds to include certain disclosures and a special legend on all general solicitation materials.

Proposed temporary amendments would require issuers to submit the materials to the Commission no later than the date of first use.

The Commission adopted a “Bad Actor” rule.

The “bad actor” rule prohibits certain individuals from participating in an offering that uses general solicitation in Rule 506 offerings if the individual had a “disqualifying event” (e.g., certain criminal convictions or Commission orders).

Click here for a detailed analysis of how these rules for private offerings and the related guidance from the Commission may apply to you.