On June 29, 2012, I discussed the crowdfunding provisions of Title III of the Jumpstart Our Business Startups Act (JOBS Act), which was signed into law by President Obama on April 5, 2012, after passage through both chambers of Congress with much fanfare and controversy.
As a follow up on other JOBS Act mandates, on August 29, 2012, the Securities and Exchange Commission (SEC) proposed rules to eliminate the prohibition against general solicitation and general advertising in the offer of securities under Rule 506 of Regulation D of the Securities Act and Rule 144A of the Securities Act. For purposes of this discussion, I will focus on Rule 506 of Regulation D, which is by far the most utilized private offering exemption for the offer and sale of securities by issuers.
In its current form, Rule 506 allows an unlimited amount of capital to be raised from an unlimited number of accredited investors and up to 35 non-accredited investors, provided that, whenever non-accredited investors participate in such an offering, certain information disclosure requirements are met. Rules 506 prohibits an issuer of securities or any person acting on its behalf from offering or selling securities by any form of general solicitation or general advertising, including, without limitation, through radio, television, the Internet, or print media, regardless of whether participating investors are accredited or non-accredited.
Title II of the JOBS Act directs the SEC to remove the ban on general solicitation and general advertising for securities offerings relying on Rule 506. By requiring the SEC to remove these restrictions, Congress sought to make it easier for companies, including those in the cleantech industry, to inform the public that they are seeking to raise capital through the sale of securities, thereby providing such companies greater access to much needed capital in a trying economy.
Specifically, Section 201(a)(1) of the JOBS Act directs the SEC to amend Rule 506 to permit general solicitation or general advertising if all purchasers of the securities are accredited investors. It also requires that the issuer take reasonable steps to verify that purchasers are accredited investors, using such methods as determined by the SEC.
Under the proposed rules issued by the SEC, companies issuing securities under Rule 506 would be permitted to use general solicitation and general advertising to offer securities, so long as the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors, and all purchasers of the securities are accredited investors because either a) they fall within one of the categories of persons who are accredited investors under Rule 501 of Regulation D, or b) the issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.
In determining the reasonableness of the steps an issuer has taken to verify that a purchaser is an accredited investor, the SEC explains that issuers are to consider the particular facts and circumstances of the transaction. This includes, among other things:
- 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
- The nature of the offering, meaning the manner in which the purchaser was solicited to participate in the offering and the terms of the offering, such as the minimum investment amount
For those of us hoping that the SEC would set forth a bright line test that would provide certainty in confirming accredited investor status, the SEC notes that proposing specific verification methods that an issuer must use “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor.”
The proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that companies conducting Rule 506 offerings without the use of general solicitation and general advertising would not be subject to the new verification rule.
Refer to Title II of the JOBS Act and the SEC’s August 29 proposed rule release for more information on these amendments to the general solicitation and general advertising provisions of Rule 506 and Rule 144A.
The SEC is seeking public comment on the proposed rules over a 30-day period, commencing on August 29. After closing the public comment period, the SEC will review such comments and determine whether to adopt the proposed rules in their current form or with one or more revisions. Until final rules are adopted, companies are reminded that the use of general solicitation and general advertising to offer securities under Rule 506 and Rule 144A is prohibited. Stay tuned…