On August 29, 2012, the SEC proposed amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act in order to implement Section 201(a) of the Jumpstart Our Business Startups Act (―JOBS Act‖). Section 201(a)(1) of the JOBS Act directed the SEC to eliminate the prohibition against general solicitation in security offerings made under Rule 506 provided that all purchasers of the securities are accredited investors. Section 201(a)(2) of the JOBS Act directed the SEC to revise Rule 144A(d)(1) to provide that securities to be sold pursuant to Rule 144A may be offered through a general solicitation so long as the final purchasers are qualified institutional buyers (―QIBs‖).
The SEC has proposed new Rule 506(c), which would permit general solicitation in security offerings made under Rule 506 provided that: (1) the issuer takes reasonable steps to verify that purchasers are accredited investors, (2) each purchaser qualifies or the issuer reasonably believes that each purchaser qualifies as an accredited investor at the time of the sale of securities, and (3) all terms and conditions of Rule 501 and Rules 502(a) and (d) are satisfied. The SEC did not propose specific verification methods to be used by issuers, but recommended that issuers consider the following factors when determining the reasonableness of the steps taken to verify that a purchaser is an accredited investor: (a) the nature of the purchaser and type of accredited investor that the purchaser claims to be, (b) the amount and type of information that the issuer has about the purchaser, and (c) the nature of the offering, such as 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 privately offered funds, including hedge funds, venture capital funds and private equity funds, the SEC stated that conducting a general solicitation pursuant to proposed Rule 506(c) would not cause an offering to be deemed a public offering for purposes of relying on the exclusions from the definition of investment company set forth in Sections 3(c)(1) and 3(c)(7) of the 1940 Act.
Comments on the proposal are due by October 5, 2012.