On July 10, 2013, in addition to adopting rules amending Rule 506 of Regulation D to permit general solicitation and adding rules regarding disqualification of “Bad Actors,” the SEC also proposed rules that would amend Regulation D, Form D and Rule 156 under the Securities Act. The provisions of the proposed rules are summarized below.
Strict Compliance with the Filing Requirements of Form D
Under proposed amendments to Rule 503 of Regulation D, issuers would be required to file Form D at least 15 days prior to using general solicitation in a Rule 506(c) offering. Additionally, issuers would have to file a closing Form D amendment 30 days after the termination of a 506(c) offering. Under amendments to Rule 507 of Regulation D, noncompliance by the issuer or any affiliate within the previous five years would disqualify an issuer from using the Rule 506 exemption for one year. The proposed rule allows a cure period of 30 days as well as application of Rule 507 waiver for good cause shown. Under the proposed amendments to Form D, issuers would be required to disclose the following additional information regarding offerings conducted in reliance on Rule 506:
Item 2 — the publicly accessible Internet website address, if any
Item 3 — in addition to information on “Related Persons,” the name and address of any person who directly or indirectly controls the issuer
Item 4 — clarification field for issuers selecting “Other” as their industry classification
Item 5 — in lieu of the current “Decline to Disclose” option for issuer size, a “Not Available to the Public” option
Item 7 — check boxes to indicate whether the form being filed is an advance Form D or a closing Form D
Item 9 — offered securities trading symbol or security identifier, if any
Item 14 — a table requiring disclosure of the number of accredited and nonaccredited investors that have purchased the offering, whether they are natural persons or legal entities, and the amount raised from each category of investors
Item 16 — the percentage of Rule 506 offering proceeds that was or will be used: (1) to repurchase or retire the issuer’s existing securities; (2) to pay offering expenses; (3) to acquire assets, otherwise than in the ordinary course of business; (4) to finance acquisitions of other businesses; (5) for working capital; and (6) to discharge indebtedness
New Items 17 through 22 would require Rule 506 issuers to disclose the following:
- the number and types of accredited investors that purchased securities in the offering
- if the securities are traded on an organized exchange, the name of the exchange
- if the issuer is a registered broker-dealer, disclose whether any general solicitation materials were filed with the Financial Industry Regulatory Authority (FINRA)
- if the issuer is a pooled investment fund advised by registered or exempt investment advisers, disclose the name and SEC file number for each investment adviser who functions directly or indirectly as a promoter of the issuer
- the types of general solicitation materials used or to be used in 506(c) offerings
- for 506(c) offerings, the methods used or to be used to verify accredited investor status
Legends and Other Disclosures
Proposed Rule 509 of Regulation D would require issuers to include the following legends on any written general solicitation materials:
- The securities may be sold only to accredited investors.
- The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act.
- The SEC has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials.
- The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities.
- Investing in securities involves risk and investors should be able to bear the loss of their investment.
Additionally, private funds would be required to include a legend disclosing that the funds are not subject to the protections of the Investment Company Act of 1940. If the materials contain performance data, they must contain the following legend regarding limitations of the usefulness of such data and providing context to understand the data presented, including:
- performance data represents past performance
- past performance does not guarantee future results
- current performance may be lower or higher than the performance data presented
- the private fund is not required by law to follow any standard methodology when calculating and representing performance data
- the performance of the fund may not be directly comparable to the performance of other private or registered funds
Amendments to Rule 156 would expand the scope of its guidance regarding fraudulent or misleading statements to include statements made in private fund materials. Additionally, the SEC has requested comment regarding the manner and content restrictions for private funds.
Mandatory Submission of Written General Solicitation Materials
Under proposed Rule 501T, issuers would be required to submit to the SEC any general solicitation materials used in a Rule 506(c) offering on or before the date that such materials are first used. Such materials would not be submitted through the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) and would not be made available to the general public. The rule would be temporary and would expire after two years. Amended Rule 507(a) would disqualify an issuer from reliance on Rule 506(c) if a court issues an injunction for the issuer’s or any predecessor or affiliate of the issuer’s failure to comply with 501T.
The proposed rules are open for public comment for 60 days from the date they are published in the Federal Register.
SEC Proposed Rules: