On August 29, 2012, the Securities and Exchange Commission (SEC) proposed amendments to Rule 506 of Regulation D (“Rule 506”) and Rule 144A (“Rule 144A”), both adopted by the SEC under Securities Act of 1933, as amended, that would eliminate the prohibition on general solicitation and general advertising in securities offerings under these rules.  The proposed rules are implementing Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”) that directed the SEC to amend Rule 506 to permit general solicitation or general advertising provided that all purchasers of the securities are accredited investors as defined in Regulation D. 

Under the proposed rules, companies issuing securities under the exemption from registration provided by Rule 506 would be permitted to use general solicitation and general advertising (such as advertising on the Internet, television, and radio, or in newspapers) to offer their securities, provided that:  

  • All purchasers of the securities being offered are “accredited investors,” as that term is defined in Rule 501 of Regulation D, or the issuer “reasonably believes” that each investor is an accredited investor at the time of the sale of the securities; and
  • The issuer takes “reasonable steps” to verify that each purchaser of the securities is an accredited investor.  

Whether the steps taken by the issuer in verifying the purchaser’s accredited investor status are  “reasonable” will be an objective determination, based on particular facts and circumstances of each transaction.  The SEC in its proposed rule did not prescribe specific verification methods or procedures, but rather provided some examples of factors that issuers are to consider in making the determination of the purchaser’s accredited investor status, such as:

  • The nature of the purchaser (a natural person or an entity) 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 (such as statements, tax documents, or reliable third-party certifications).  
  • The manner in which the purchaser was solicited to participate in the offering.  
  • The terms of the offering, such as a minimum investment amount.  

While the SEC did not in its discussion of the proposed rule state that reliance on investor self-certification is not permissible, given the facts-and-circumstances approach of the SEC, reliance on that certification without more may be problematic once the amended rule has been finally adopted. 

The SEC did not amend Regulation S, the rule dealing with offers and sales of securities outside of the United States, which regulation does not permit “directed selling efforts” in the United States as to those offerings.  This means that an issuer concurrently offering securities under Rule 506 of Regulation D and offshore in reliance on Regulation S must not permit its general solicitation and advertising as to the Rule 506 offering to become “directed selling efforts” that would defeat reliance on Regulation S for offshore offerings of the same security.  

Companies that would like to continue offering securities under Rule 506 without using general solicitation or general advertising will not be subject to the new verification rule because the proposed rules would preserve the existing portions of Rule 506 as a separate exemption.

The proposed rules also amend Rule 144A, which governs the resale of securities by qualified institutional buyers (QIBs).  Under Revised Rule 144A, QIBs will be permitted to use general solicitation and advertising when offering to resell securities they acquired in Rule 144A transactions even if that general solicitation and advertising is deemed to be an offer to persons who are not QIBs, provided the securities are sold only to persons whom the selling QIB reasonably believes are QIBs. 

Public comments on the proposed rules will be due within 30 days from the date of publication in the Federal Register.  Based on the review of the submitted comments, the SEC will determine whether to adopt the proposed rules in their current or modified form.  Until the proposed rules are actually adopted, the prohibition against general solicitation and general advertising for Rule 506 offerings will remain in place, notwithstanding the JOBS Act’s requirement that the SEC adopt revisions to Rule 506 by July 4, 2012.