On Wednesday, July 10, 2013, the SEC adopted revisions to Rule 506, the most frequently used private placement provision, to:
- permit advertised private placements, a change mandated by the JOBS Act (the adopting release can be found here); and
- prohibit persons with certain securities law violations (bad actors) from using Rule 506 (the adopting release can be found here), a change required by Dodd-Frank.
The SEC also proposed amendments to Regulation D, Form D and Rule 156 under the Securities Act (the proposing release can be found here).
The description below is based upon the discussion at the SEC meeting. We will provide a more detailed analysis of the SEC revisions to Rule 506 and proposed rule changes after we have an opportunity to review the applicable releases.
Advertised Private Placements
The prohibition against general solicitation and general advertising has been eliminated in certain securities offerings conducted pursuant to Rule 506 of Regulation D or Rule 144A under the Securities Act.
The rule changes are very similar to the changes proposed by the SEC last August. However, in response to comments on the proposed rule changes, the final rule amendments include a principles-based method for verification of accredited investor status for individual investors, including non-exclusive methods to verify compliance with the income and net worth tests and the use of third-party verification. The SEC did not adopt most of the suggestions from investor advocates.
The vote on this matter was 4-1, with Commissioner Aguilar voting against. These changes will become effective 60 days after the adopting release is published in the Federal Register.
Bad Actor Disqualification
Certain “felons and other ‘bad actors’ ” cannot rely on Rule 506.
These “bad actor” disqualifications are similar to the SEC’s original proposal in May 2011, except that the categories of people subject to disqualification have been changed in response to comments, and the disqualifying events have been expanded to, among other things, include CFTC actions. In addition, the “retroactivity” provisions of the original proposal, which generated significant comments, have been changed so that disqualifying events are limited to those taking place after the effective date. Previous similar events will require disclosure.
All SEC commissioners voted in favor of this matter. These changes will also become effective 60 days after the adopting release is published in the Federal Register.
Proposed Changes to Regulation D, Form D and Rule 156
In addition to the final rule amendments, the SEC proposed amendments to Regulation D, Form D and Rule 156 under the Securities Act. The proposed amendments are intended to enhance the SEC’s ability to evaluate changes in the market and to address the development of practices in Rule 506 offerings. The proposed changes include:
- requiring more information in Form D;
- requiring the filing of Form D before using general solicitation, and at the completion of the offering;
- disqualifying an issuer who fails to comply with the Regulation D filing requirements for a period of one year;
- use of cautionary legends on soliciting material;
- filing of soliciting material with the SEC (proposed as a temporary two-year provision); and
- revising Rule 156, which deals with advertising by mutual funds, so that it also applies to advertising by private investment vehicles.
The vote on this matter was 3-2, with Commissioners Paredes and Gallagher voting against.
There will be a 60-day comment period on these proposals.
Several investor advocates actively opposed the approach the SEC has taken on advertised private placements. It remains to be seen whether there will be litigation over this matter. In any event, it is likely that investor advocates will aggressively advance their positions in the comment process for the proposed amendments to Regulation D, Form D and Rule 156 described above. Comments can also be expected from industry participants and both Republican and Democratic legislators.