At its meeting today, the SEC adopted new Rule 506(c) substantially as proposed. In response to public comment, the Rule was amended to include a nonexclusive list of verification methods for use in certain circumstances in determining whether an investor is an accredited investor, including verification of individual income and net worth requirements, as well as verification of existing investors. Conforming amendments were made to Rule 144A and Regulation S.
In their remarks, the individual commissioners expressed deep concern about the potential for fraudulent activity under new Rule 506(c) and repeatedly cautioned market participants that the SEC will be closely monitoring activity under the Rule.
In addition, the SEC adopted disqualification standards pursuant to Section 926 of Dodd-Frank that will prevent issuers connected to felons and other bad actors from using Rule 506, including new Rule 506(c). Importantly, the disqualification triggers will apply only to acts that occur after the effective date of the disqualification rule. In addition, the proposed rule was amended to relax the attribution to issuers of bad acts of significant stockholders so that such acts will apply only to stockholders beneficially owning more than 20 percent of an issuer’s voting power. Finally, the categories of persons whose bad acts would disqualify an issuer from using Rule 506 were significantly reduced from the disqualification rule as originally proposed.
The SEC also proposed rule changes that would significantly increase the informational requirements applicable to Rule 506 offerings. As proposed, the rule changes would:
require additional information to be provided in Form D;
eliminate the ability of an issuer to use Rule 506 if it failed to file a required Form D during the prior five-year period (with certain cure provisions);
require issuers using new Rule 506(c) to file a Form D at least 15 days prior to engaging in any general solicitation and to file a final amendment to that Form D not later than 30 days from the end of the offering;
for a two-year period, require issuers engaging in general solicitations under Rule 506(c) to submit their solicitation provisions to the SEC on a confidential basis;
impose legending requirements on any general solicitation materials; and
extend the advertising guidance in Rule 156 to private funds.
These rule proposals will be subject to public comment for 60 days after publication. Importantly, the proposed rule changes will not be effective before Rule 506(c) becomes effective. Neither the Staff nor the SEC discussed any potential transitional provisions that would impose these requirements on issuers conducting offerings under Rule 506 prior to their effectiveness, although that issue may be addressed in the proposing release when it becomes available. A number of commissioners expressed concern about the burden these proposed changes would impose on issuers contemplating Rule 506 offerings and the proposal passed by a 3-2 vote.
The new rules will become effective 60 days after their publication in the Federal Register.