The SEC has proposed to revise Regulation D to provide additional flexibility to issuers and to clarify and improve the application of its rules. This proposal follows other proposed amendments to Regulation D made by the SEC in a release issued in December 2006 (the "Private Pooled Investment Vehicle Release").
Regulation D consists of a series of rules. Rules 501 through 503 contain definitions, conditions, and other provisions that apply generally throughout Regulation D. Rules 504 through 506 detail specific exemptions from registration under the Securities Act.
Rule 504 provides exemptions for companies that are not subject to reporting requirements under the Securities Exchange Act of 1934 (Exchange Act) for the offer and sale of up to $1 million of securities in a 12-month period. Rule 505 exempts offers by companies of up to $5 million of securities in a 12-month period, so long as offers are made without general solicitation or advertising. Rule 506 is a safe harbor under Section 4(2) of the Securities Act and provides an exemption from registration without any limit on the offering amount, so long as offers are made without general solicitation or advertising, and sales are made only to "accredited investors" and a limited number of non-accredited investors who satisfy an investment sophistication standard.
The SEC proposes to make changes in the following four principal areas involving Regulation D:
- Creating Rule 507, a new exemption from the registration provisions of the Securities Act for offers and sales to "large accredited investors";
- Revising the definition of the term "accredited investor" to clarify it and reflect developments since its adoption;
- Shortening the length of time required by the integration safe harbor for Regulation D offerings; and
- Providing uniform disqualification provisions throughout Regulation D.
Under proposed new Rule 507, the large accredited investors exemption, limited advertising of these offerings would be permitted. Large accredited investors would consist of the same categories of entities and individuals that qualify for accredited investor status under existing Rule 506, but with significantly higher dollar-amount thresholds for investors subject to such thresholds. Legal entities that are considered accredited investors if their assets exceed $5 million would be required to have $10 million in investments to qualify as large accredited investors. Individuals generally would be required to own $2.5 million in investments or have annual income of $400,000 (or $600,000 with one?s spouse) to qualify as large accredited investors, as compared to the current accredited investor standard of $1 million in net worth or annual income of $200,000 (or $300,000 with one's spouse). Legal entities that are not subject to dollar-amount thresholds to qualify as accredited investors (generally government-regulated entities) would not be subject to dollar-amount thresholds to qualify as large accredited investors.
The proposed Rule 507 exemption would share the following characteristics with the Rule 506 exemption:
- It would allow an issuer to sell an unlimited amount of its securities to an unlimited number of investors who meet specified criteria - accredited investors in the case of Rule 506 transactions and large accredited investors in the case of Rule 507 transactions;
- Its availability would focus on purchasers and not depend on the characteristics of offerees;
- It would place no restrictions on the payment of commissions or similar transaction-related compensation;
- It would be non-exclusive, meaning that the issuer could choose to claim any other available exemption without the benefit of the rule;
- Securities acquired in a transaction under the rule would be subject to the limitations on resale under Rule 502(d) and therefore would be treated as "restricted securities" as defined in Securities Act Rule 144(a)(3)(ii);
- The issuer would be required to exercise reasonable care to assure that the purchasers of the securities are not underwriters; and
- The issuer would have an obligation to file a notice of sales in the offering with the SEC on Form D.
Rule 507 would differ from Rule 506 in five ways:
- Large Accredited Investor Standard. Rule 507 would be premised on the concept of large accredited investors. Rule 506 would continue to be premised on the concept of accredited investors.
- Limited Advertising Permitted. Instead of a total ban on general solicitation and general advertising, as is the case in Rule 506 transactions, issuers in Rule 507 transactions could engage in limited advertisements that comply with the requirements of the rule. All other general solicitation and advertising would be prohibited.
- No Sales to Persons Who Do Not Qualify as Large Accredited Investors. Issuers in Rule 507 transactions would not be allowed to sell securities to any investor who does not qualify as a large accredited investor. In Rule 506 transactions, issuers may sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors.
- Authority for Exemption. Rule 507 would be adopted as an exemption primarily under the SEC's general exemptive authority under Section 28 of the Securities Act, while Rule 506 was adopted as a safe harbor under Section 4(2) of the Securities Act.
- Covered Security Status. Securities sold in accordance with either of these rules would be considered "covered securities," but under different provisions of Section 18 of the Securities Act. Securities sold under Rule 507 would be covered securities because the purchasing large accredited investors would be defined as "qualified purchasers" under Section 18(b)(3) of the Securities Act. Securities sold under Rule 506 would continue to be covered securities under Section 18(b)(4)(D) of the Securities Act because Rule 506 was under Section 4(2) of the Securities Act.
Rule 507 would permit an issuer in an exempt transaction to publish a limited announcement of an offering. The announcement would be required to state prominently that sales will be made to large accredited investors only, that no money or other consideration is being solicited or will be accepted through the announcement, and that the securities have not been registered with or approved by the SEC and are being offered and sold pursuant to an exemption. At the issuer's option, the announcement also could contain the following additional information:
- The name and address of the issuer;
- A brief description of the business of the issuer in 25 or fewer words;
- The name, type, number, price, and aggregate amount of securities being offered and a brief description of the securities;
- A description of what large accredited investor means;
- Any suitability standards and minimum investment requirements for prospective purchasers in the offering; and
- The name, postal or email address, and telephone number of a person to contact for additional information.
Pooled investment vehicles that rely on the exclusion from the definition of "investment company" provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act would not be able to take advantage of the limited advertising proposed to be permitted under Rule 507. This results because those vehicles are required to sell their securities in transactions not involving a public offering. Such vehicles typically rely on Section 4(2) to meet this requirement, frequently through Rule 506, which expressly forbids general solicitation and general advertising. Accordingly, they would be precluded from selling their securities in reliance on Rule 507 advertising.
The SEC also proposed revisions to the definition of the term "accredited investor" in Rule 501(a) of Regulation D, which sets forth the standards to qualify as an accredited investor.
The proposed revisions would:
- add an alternative "investments-owned" standard to Rule 501(a);
- define the term "joint investments";
- establish a mechanism to adjust the dollar-amount thresholds in future definitions to reflect inflation; and
- add several categories of permitted entities to the list of accredited and large accredited investors.
As noted, the SEC in its December 2006 Private Pooled Investment Vehicle Release proposed to revise Regulation D to establish a new category of accredited investor, "accredited natural person," that individuals would need to satisfy in order to invest in certain private pooled investment vehicles relying on Rule 506. In the Private Pooled Investment Vehicle Release, the SEC expressed concerns about the increased number of individual investors who today may be eligible as accredited investors to make investments in pooled investment vehicles relying on Section 3(c)(1) of the Investment Company Act of 1940.
The SEC received numerous comments disagreeing with the proposed definition of accredited natural person set forth in its Private Pooled Investment Vehicle Release. Most of those submitting comments argued that the proposal limits investor access to private pooled investment vehicles and questioned the dollar amount of the investments standard.
In its latest release, the SEC proposed additional revisions to Regulation D, including amendments to Rule 502 of Regulation D. Rule 502 sets forth conditions that are applicable to offers and sales made under Regulation D. The SEC proposes to make changes to those conditions, including shortening the amount of time issuers are required to wait to make offers and sales in order to rely on the integration safe harbor provided in Rule 502(a) and adding disqualification provisions for certain issuers seeking to rely on the exemptions in Regulation D. The SEC also has proposed new guidance regarding the integration of concurrent public and private offerings.
Comments on the proposals are due to the SEC by October 9, 2007.
Please click http://www.sec.gov/rules/proposed/2007/33-8828.pdf to access a copy of the proposal.