On July 10, 2013, the United States Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 506 of Regulation D under the Securities Act of 1933, as amended, that will lift the ban on general solicitation for certain private offerings, including offerings of private fund interests (“New Rule 506(c)”). New Rule 506(c) will become effective 60 days after publication in the Federal Register.
For a more complete discussion of New Rule 506(c), please see Rule 506 Revolution: The SEC Adopts Significant Amendments to the Rules Regarding Private Offerings of Securities.
New Rule 506(c)
Under New Rule 506(c), a private fund manager generally may engage in all forms of communication with, and solicitation of, prospective investors if the sale of private fund interests satisfies the following conditions:
- all investors must be accredited investors (or the private fund manager must reasonably believe that all investors are accredited investors); and
- the private fund manager must take “reasonable steps” to verify accredited investor status.
Whether a private fund manager has taken “reasonable steps” to verify accredited investor status will be determined objectively, based on the facts and circumstances of each investor and transaction. While private fund managers may not solely rely on an investor’s representation in its subscription documents that such investor is accredited, New Rule 506(c) provides a non-exclusive list of verification methods that private fund managers may use to verify accredited investor status.
New Rule 506(c) does not eliminate Rule 506(b) under which many private fund managers have previously offered private fund interests. Under Rule 506(b), private fund managers may continue to refrain from a general solicitation and issue private fund interests to an unlimited number of accredited investors and no more than 35 “sophisticated” non-accredited investors. In an effort to differentiate between the two types of offerings, private fund managers will be required to indicate on Form D whether they are relying on New Rule 506(c).
Key Considerations for Private Fund Managers
Before engaging in a general solicitation, private fund managers should consider the following:
- CFTC Exemptions. Any general solicitation may jeopardize a private fund manager’s current exemptions from regulation by the Commodities Futures Trading Commission (the “CFTC”) (absent further guidance from the CFTC).
- Foreign Private Placement Regulations. Despite the availability of general solicitations in the United States, certain foreign countries may consider a general solicitation conducted within or from the United States (including information on a private fund manager’s unrestricted website) to be in violation of their private placement regulations.
- SEC Proposed Amendments. The SEC has proposed amendments to Regulation D and Form D that would require private fund managers offering private fund interests under New Rule 506(c) to, among other things, (i) file a Form D no later than 15 days prior to the commencement of the offering, (ii) include additional disclosures in the private fund’s general solicitation materials and (iii) submit the private fund’s general solicitation materials to the SEC for review.
- Expanded State Investor Protection Rules. While New Rule 506(c) will preempt state “blue sky” laws prohibiting general solicitation, state legislatures or securities authorities may amend their applicable statutes and rules in order to address state-specific investor protection concerns in reaction to New Rule 506(c).
- Verification of Accredited Investor Status. Under the current rule (Rule 506(b)), private fund managers typically rely on investor questionnaires and subscription documents in order to establish a basis for a reasonable belief that each investor meets the definition of accredited investor. In order to rely on New Rule 506(c), however, private fund managers must take “reasonable steps” to verify the accredited investor status of each investor and generally will not be able to rely solely on the representations made by an investor in its subscription documents. In light of the enhanced verification and other requirements that will be associated with New Rule 506(c), some private fund managers may prefer to conduct private placement offerings of private fund interests as they have in the past in reliance on Rule 506(b) without engaging in any general solicitation.