On July 10, 2013, the Securities and Exchange Commission (“SEC”) (1) approved final rules (the “Final General Solicitation Rules”)1 eliminating the prohibition against general solicitation and general advertising in connection with certain private offerings to accredited investors conducted in reliance on Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and allowing general solicitation in connection with securities offerings conducted under SEC Rule 144A, (2) approved final rules (“Final Bad Actor Rules”)2 disqualifying securities offerings from relying on Rule 506 if they involve certain felons or other “bad actors,” and (3) proposed rules (the “Proposal”)3 requiring issuers making offerings under newly amended Rule 506 to provide additional information about their offerings to enable the SEC to monitor Rule 506 offerings involving general solicitation.
These developments will significantly impact the manner in which private securities offerings are conducted in the United States. However, issuers must consider a number of factors, including the application of other rules and regulations, before they undertake any private offering involving general solicitation pursuant to the Final General Solicitation Rules.
The SEC’s two final rulemakings will be effective 60 days after their respective publication in the Federal Register. Until that date, the SEC’s existing regime regulating Rule 506 and 144A offerings remains unchanged. The Proposal will be open for public comment for 60 days from its publication in the Federal Register. Federal Register publication may take anywhere from several days to several weeks, depending on the circumstances.
A more detailed Sidley Update on the foregoing developments is being prepared. However, pending completion of that Sidley Update, the following provides a basic overview of these important developments.
Elimination of Prohibition Against General SolicitationThe SEC approved by a 4-1 vote final rules eliminating the prohibition against general solicitation for the offer and sale of securities conducted under Rule 5064 of Regulation D of the Securities Act and Rule 144A under the Securities Act, as long as all purchasers are accredited investors or qualified institutional buyers (“QIBs”)5, respectively. This rulemaking was mandated by Section 201(a) of the Jumpstart Our Business Startups Act and the SEC is over a year past the date by which it was mandated by Congress to have adopted final rules.
Under the Final General Solicitation Rules, new Rule 506(c) will eliminate the prohibition against general solicitation with respect to offers and sales of securities made under that rule, provided that:
- all terms and conditions of Rule 501 and Rules 502(a) and (d) are satisfied;
- all purchasers of the securities are “accredited investors;” and
- the issuer takes “reasonable steps” to verify that the purchasers of the securities are “accredited investors.”
Existing Rule 506 (re-designated Rule 506(b)) will remain available for issuers not wishing to engage in general solicitation.
In response to public comments, the SEC has provided a list of non-exclusive methods an issuer may use to verify accredited investor status.
Previous Sidley Updates on this topic are available at:
“Bad Actor” DisqualificationThe SEC unanimously approved final rules that will disqualify securities offerings involving certain felons and other “bad actors” from reliance on Rule 506 under Regulation D. This rulemaking was mandated by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Bad Actor Rules differ from the proposed rules in certain respects by narrowing the types of individuals who are considered “covered persons,” expanding the list of triggering events and limiting the disqualification only to triggering events that occur after the effectiveness of the Final Bad Actor Rules.
The previous Sidley Update on this topic is available here.
Proposed Amendments Related to the Elimination of the General Solicitation Ban The SEC also proposed rules that would amend Regulation D, Form D and Rule 156 under the Securities Act to allow the SEC to respond to changes in the Rule 506 market brought about by the Final General Solicitation Rules.
The Proposal would amend Form D to require disclosure of additional information, particularly about Rule 506(c) offerings. Under the Proposal, issuers failing to file a Form D would be disqualified from relying on Regulation D for one year, subject to a cure period for late filings.
The Proposal would also (i) extend Rule 156 under the Securities Act to advertisements used by private funds, (ii) require issuers to include certain legends in all general solicitation materials and (iii) for a period of two years following the effective date of a final rule resulting from the Proposal, require issuers conducting Rule 506(c) offerings to file general solicitation materials with the SEC. Additionally, the Proposal solicits public comment on possible amendments to the definition of “accredited investor.”
The Proposal was approved for publication on a 3-2 vote. Chairman White indicated that the Commission would move quickly to implement the Proposal.
1The text of the Final General Solicitation Rules is available at http://www.sec.gov/rules/final/2013/33-9415.pdf. 2The text of the Final Bad Actor Rules is available at http://www.sec.gov/rules/final/2013/33-9414.pdf. 3The text of the Proposal is available at http://www.sec.gov/rules/proposed/2013/33-9416.pdf. 4Rule 506 is the primary rule under which private funds conduct offers and sales of securities in the United States. It allows offerings in unlimited dollar amounts to an unlimited number of investors, provided that no more than 35 of the purchasers are not “accredited investors.” However, the elimination of the restriction on general solicitation applies only if all investors are “accredited investors.” Note that the prohibition on general solicitation will continue to apply to offerings made under Rule 504 and Rule 505 of Regulation D. 5Rule 144A is a safe harbor from registration under the Securities Act for resales of certain eligible securities to QIBs.
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