With only one dissenting vote, the commissioners of the Securities and Exchange Commission (“SEC”) voted at a meeting this morning to adopt a proposed rule that would eliminate the current prohibition against general solicitation and general advertising in securities offerings conducted under the Securities Act of 1933 (the “Securities Act”) pursuant to Rule 506 of Regulation D and Rule 144A (“Rule 144A”). The public comment period on the rule proposal will last thirty days.
Issuing a proposed rule, rather than an interim final rule as had been speculated, calls into question whether the SEC will finalize a general solicitation rule before next year. The SEC has already missed the deadline to repeal the ban on general solicitation and general advertising in private placements as required by the Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law in April 2012. The JOBS Act seeks to spur economic growth by making it easier for smaller companies to raise capital.
Under the current law, private placement issuers may not attract investors by means of general solicitation or general advertising including, without limitation, communications in newspapers, television or radio broadcasts and website publications. Advocates of lifting the ban believe that the current restrictions prevent many small businesses from gaining access to sufficient sources of capital, while critics argue that the restrictions provide important investor protections and prevent fraud.
The proposed new Rule 506(c) (the “New Rule”) will allow issuers to conduct general solicitation and general advertising in securities offerings; provided, that the purchasers are limited solely to accredited investors (“AIs”) and, in the case of Rule 144A, qualified institutional buyers (“QIBs”). The SEC specified at today’s meeting that issuers must reasonably believe, and take reasonable steps to verify, that the investors are AIs or QIBs. The New Rule does not specify what constitutes reasonable verification methods or what constitutes reasonable belief, but provides that those determinations would be made based on the facts and circumstances at hand (i.e., depending on the nature of the investors and the offering, these standards may vary).
The existing ban on general solicitation and general advertising remains in effect until the New Rule is finalized. Certain rules, including those adopted by the National Futures Association and the U.S. Commodity Futures Trading Commission, will continue to prohibit public marketing unless and until repealed or modified.
Finally, the SEC stated that there would be a new box to check on Form D that will require issuers to indicate whether or not the offering was conducted pursuant to the New Rule. The SEC plans to track the effectiveness of the New Rule in terms of raising capital.
We will review the entire rule proposal upon release and provide you with additional updates as events merit.
For additional information regarding the original adoption of the JOBS Act, please click here.