The SEC has finally adopted a new regulation as required by the JOBS Act to permit general solicitation and advertising for Regulation D private placements, provided all investors whose subscriptions are accepted are reasonably determined by the issuer to be accredited investors. The new rule will become effective 60 days after it is published in the Federal Register, which we expect to occur within the next several days. Hence, the new rule will be in effect on or about September 12, 2013. We will advise as soon as the exact date is known.
Currently, and until the effective date of the new rule, an issuer relying on the Regulation D exemption for its private placement from the registration requirements for securities offerings otherwise required under the Securities Act of 1933, as amended (the “’33 Act”), was forbidden from making a general solicitation or otherwise advertising its offering. It could only make offers to persons with whom it had an established relationship, and that relationship could not have been formed from its advertising that is was seeking investors.
When the new rule becomes effective, an issuer can generally solicit and advertise its offering, but it may only sell the securities being offered to accredited investors. Under the prior rule, which will continue for those issuers willing to forgo general solicitation and advertising, an issuer may sell to both accredited investors and up to 35 non-accredited investors. Under the new rule, denominated Rule 506(c), the issuer must reasonably conclude that each investor meets one of the tests to be an accredited investor to qualify for purchase when the general solicitation and advertising opportunity is utilized.
In the new rule, the SEC has not mandated the documentation obligations of the issuer, but has provided “safe harbors.” For instance, if the issuer receives copies of the investor’s federal tax documents, such as a W-2, Form 1099, K-1, etc., showing the required income, along with a written representation from the issuer as to future expected income at the requisite level (annual income of $200,000 for an individual or $300,000 for the investor and his or her spouse), the issuer will have acted reasonably. Similarly, if the investor is relying on his or her net worth to qualify (i.e., $1 million less the value of the investor’s primary residence) and the issuer receives (a) bank documents, brokerage statements, third-party appraisal reports, and a consumer report from a credit reporting agency reporting debts or (b) written confirmation of accredited investor status from a registered broker-dealer, an SEC-registered investment advisor, a licensed attorney, or a registered CPA, the issuer will have acted reasonably in concluding the investor is an accredited investor. These safe harbors are neither mandated nor exclusive, but if other information is relied on, it should be of equal or better evidentiary value as to income or net worth.
While the new Rule 506(c) will permit general solicitation and advertising, such that an issuer will be able to market its offering via internet disclosure, newspaper, radio, TV, and magazine advertising, the antifraud rules of the ’33 Act and under the Securities Exchange Act of 1934, as amended (the “’34 Act”), will continue to apply. We anticipate that any advertisement will be treated as part of the offering and will need to be consistent with whatever offering document is being used to avoid potential liability under the antifraud rules of the ’33 Act and the ’34 Act. Until there has been significant experience by issuers and the SEC with application of the new rules and the scope of activities issuers will engage in under the new rules, caution is necessary in making use of the rules.
As with all private placements seeking to rely on Regulation D, the issuer continues to be obligated to file a Form D with the SEC within 15 calendar days of the first sale of securities relying on Regulation D, Rule 506(c). A new Form D is to be used that has a box to be checked to indicate that the issuer is relying on Rule 506(c) for its offering.
The SEC also, as required by Section 926 of the Dodd-Frank Act, has adopted a new regulation that forbids issuers who are (or are controlled by) certain convicted felons or others who have been sanctioned by the SEC or other specified agencies from utilizing the new Rule 506(c) solicitation opportunity.
While not immediately applicable, the SEC has also proposed additional rules that will first be subject to public comment over the next 60 days that will increase the amount and timing of disclosure to the SEC for offerings relying on the general solicitation and advertising exemption permitted by new Rule 506(c).