On August 29, 2012, the SEC proposed amendments to Rule 506 of Regulation D under the Securities Act of 1933 to implement Section 201(a) of the Jumpstart Our Business Startups (JOBS) Act. The proposed amendment to Rule 506 would eliminate the prohibition against general solicitation and general advertising contained in Regulation D with respect to offers and sales of securities made pursuant to Rule 506, provided that all purchasers are “accredited investors.”
The SEC’s proposed rules implement a bifurcated approach to Rule 506 offerings, pursuant to which an issuer may still conduct a private offering in reliance on Rule 506 without using general solicitation, in the same manner as before.
In addition, however, an issuer may conduct a Rule 506 offering using a general solicitation, so long as (i) the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors; (ii) all purchasers of securities are accredited investors or the issuer reasonably believes such purchasers are accredited investors at the time of the sale of the securities; and (iii) all terms and conditions of Rule 501 and Rules 502(a) and 502(d) have been satisfied.
One of the most controversial aspects of the proposed rule is the investor verification process. The SEC proposal provides for a flexible approach to investor verification, and acknowledges that “reasonable efforts” to verify investor status may differ depending on the facts and circumstances. To that end, the SEC provides a non-exhaustive list of factors that may be appropriate to consider, which includes the nature of the purchaser and the nature and amount of information about the purchaser. Simply put, the SEC states that “the more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it would have to take, and vice versa.”
The SEC attempted to strike a balance between respecting investors’ privacy and the need to demonstrate that investors qualify as accredited investors. The release stops short of requiring that individuals submit financial statements, and instead suggests that reasonable steps may include relying on publicly available information or independent verification of a person’s status as an accredited investor by a third-party agent, so long as there is a reasonable basis to rely on the third-party verification. Moreover, the SEC noted that the nature of the offering may be relevant in determining the reasonableness of steps taken to verify status.
In particular, the SEC noted that a “check a box” indication of accredited investor status would not be sufficient for general solicitations to the public.
Lifting the ban on general solicitations and advertising in Rule 506 offerings would represent a significant shift in the way the federal securities laws regulate private placements. Although the release does not provide precise directives regarding investor verification, it reflects the Staff’s understandable caution with respect to implementing Congress’ directives in this regard.
Eliminating the Prohibition Against General Solicitation and Advertising in Rule 506 and Rule 144A Offerings, Rel. No. 33-9354 (August 29, 2012), available at http://www.sec.gov/rules/proposed/2012/33-9354.pdf; see also Solicitation Emancipation: Proposed Rules Relating to the Relaxation of the Prohibition on General Solicitation, available at http://www.mofo.com/files/Uploads/Images/120829-Solicitation-Emancipation.pdf.