The U.S. Securities and Exchange Commission (the "SEC") today proposed amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the Jumpstart Our Business Startups Act. The proposed amendment to Rule 506 would eliminate the prohibition of "general solicitation and general advertising" in connection with offers and sales of securities made pursuant to the safe harbor exemption of Rule 506, provided that all purchasers are accredited investors. The proposed amendment also requires issuers using general solicitation or general advertising in Rule 506 offerings to take reasonable steps to verify that purchasers of the securities are accredited investors. The proposed amendment to Rule 144A would provide that securities may be offered under Rule 144A to persons who are not qualified institutional buyers ("QIBs"), provided that all purchasers are QIBs or reasonably believed to be QIBs by the seller and any person acting on behalf of the seller. This email contains a brief summary of certain proposed rules and accompanying statements released by the SEC today. A more detailed Paul, Weiss Client Memorandum addressing the proposed rules will follow in the coming days.

In determining the reasonableness of the steps that a Rule 506 issuer has taken to verify that a purchaser is an accredited investor, the SEC's proposing release provides that issuers are to consider the facts and circumstances of the transaction, including, among other factors:

  • The type of 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, including:
    • The manner in which the purchaser was solicited to participate in the offering; and
    • The terms of the offering, such as a minimum investment amount.

The proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that issuers conducting Rule 506 offerings without the use of general solicitation and general advertising would not be subject to the new verification rule.

In addition, the proposed rules would amend Form D, which issuers must file with the SEC when they sell securities under Regulation D. The revised form would add a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and general advertising.

The SEC's release also addresses the implications of the proposed amendments on other federal securities laws, including the following:

  • Offerings marketed via general solicitation or general advertising pursuant to Rule 506 will not constitute a "public offering" under other federal securities laws, including the exemptions from registration as an investment company available under Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act of 1940.
  • The use of general solicitation or general advertising for a domestic offering under Rule 506 will not constitute "directed selling efforts" in connection with a contemporaneous offshore offering under Regulation S.

Comments on the proposed rules are due no later than 30 days after publication of the proposed rules in the Federal Register.

For a copy of the proposed rules, see http://paulweissinfo.com/collect/click.aspx?u=/G1GTPto3VUNv/aydR2aX/Xt1X3anDEaLXtkXDxkBlumQHcdvIeGPagWQ8R9uBiiLldw5injIKo=&rh=ff000a7208142572d7fc80ef7a4ab14a8d5701d5.