You’ve heard by now that last week the SEC finally approved long-overdue amendments to Rule 506 of Regulation D, which is the primary method for issuing securities in an unregistered private offering. The new rules were mandated by the JOBS Act, enacted in April 2012.
In a nutshell, the SEC:
- Amended Rule 506 to allow securities to be offered through “general solicitation and advertising” so long only accredited investors are allowed to actually purchase in the offering;
- Amended Rule 506 to disqualify specified categories of “bad actors” from participating in offerings under that registration exemption; and
- Proposed a new rule that would enhance Form D filings in connection with a general solicitation Rule 506 offering to enable the SEC to better monitor the impact of general solicitation on the private placement market.
How much does this impact a mid-size public company?
Virtually not at all.
This is one of those much publicized, high-profile rule changes that you just don’t need to worry about. The amendments are designed to help small private companies raise capital by casting a broader net for potential investors without running afoul of the requirement that unregistered offerings be conducted in private.
Yes, it’s true that mid-sized public companies occasionally issue debt or equity in unregistered private offerings. The most common method is a Rule 144A debt offering to qualified institutional buyers (QIBs). The new rules, in fact, ease the Rule 144A limitations by allowing offers to non-QIBs, so long as only persons the issuer reasonably believes to be QIBs actually purchase in the offering.
But the reality is that virtually all mid-size public company private offerings (Rule 144A and otherwise) target a handful of large institutional investors through a carefully managed sales process led by investment bankers. In other words, there is no need or desire to engage in general solicitation.
Likewise, the enhanced “bad actor” requirements for Rule 506 offerings likewise will rarely come into play so long as you are dealing with reputable broker/dealers or investment bankers.
While these rule changes will be meaningful for private companies and perhaps small public companies (e.g., Emerging Growth Companies), the middle market should not be impacted.