In August 2012, the SEC released its long-awaited proposed rules under the JOBS Act. The proposed rules would, subject to several limitations, enable issuers and underwriters to effect a general solicitation in connection with offerings under Regulation D and Rule 144A, provided that the relevant securities are sold only to accredited investors or qualified institutional buyers (“QIBs”), as applicable.
The SEC’s proposing release may be found at the following link on the SEC website: http://www.sec.gov/rules/proposed.shtml. For our firm’s summary of the new rules, please see our client alert, “Solicitation Emancipation,” which may be found at the following link: http://www.mofo.com/files/Uploads/Images/120829-Solicitation-Emancipation.pdf.
Removal of Restriction on General Solicitation
If adopted in their present form, the new rules would open up a variety of potential offering opportunities for issuers and underwriters of structured notes issued pursuant to exempt continuous offering programs. For example, these programs could utilize unrestricted websites in order to publicize their existence and the securities that they offer. Such websites could also post the offering documents for current and completed offerings.
Under current rules, publicity of this kind would render the programs and offerings unable to take advantage of the relevant private placement exemptions. As a result, issuers and underwriters engage in very limited publicity relating to these programs, and any websites that relate to these programs are typically accessible only on a password-protected basis.
Rule 144A and Regulation D programs would be the principal beneficiaries of these new features. In addition, private bank note programs operated by national banks under Part 16.6 of the OCC’s securities offering rules, which incorporate the provisions of Regulation D and Rule 144A, could also benefit from the new rules.6
Adoption of New Practices?
With respect to Regulation D offerings, new Rule 506(c)(2)(ii) would require the issuer to take reasonable steps to verify that purchasers of the securities are in fact accredited investors.7 In the proposing release, the SEC indicated that the manner in which the securities are offered will affect the determination of whether the steps are reasonable—the more broadly the securities are marketed, the more exacting the required steps. Broker-dealers who have an existing relationship with investors, and access to their financial information, may frequently be in a good position to reach a conclusion as to a potential investor’s accredited investor status. However, if a website is used to solicit new investors in a Regulation D offering, the issuer and any broker-dealer should proceed with an increased degree of caution in establishing the accredited status of the new investors.
The Rule 144A market for structured notes has historically functioned without significant use of websites as a means of disseminating offering information. However, the new rules would present issuers and underwriters with an additional means of soliciting interest among institutional investors, and of communicating potential offering terms.
The new rules are subject to a 30-day comment period. This period is shorter than the typical SEC comment period, primarily due to the fact that these new rules were required to be adopted by the JOBS Act. After the SEC has the opportunity to review the comments, final rules are expected to be adopted. These rules are likely to enable broader publicity of private structured note programs than the U.S. market has previously seen. The market will then have the chance to observe whether participants attempt to capitalize on these rules in connection with private structured note programs.