Executive Summary
On July 10, 2013, the SEC adopted a final rule passing amendments dictated by the JOBS Act. Such amendments lift the ban on general solicitation and general advertising for certain securities offerings under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933. The SEC also adopted a final rule barring felons and other bad actors from relying on Rule 506, as dictated by Section 926 of the Dodd-Frank Act. These final rules become effective 60 days after their publication in the Federal Register.
The SEC further offered a proposal that would enhance its ability to monitor and address market developments in Rule 506 offerings. This proposal is subject to a 60-day public comment period.
A brief discussion of these developments follows.
Elimination of Prohibition on General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
The SEC adopted a final rule regarding amendments to Rule 506 of Regulation D. Such amendments that permits general solicitation and general advertising in their securities offerings if (1) the issuer takes reasonable steps to confirm that investors are accredited investors; and, (2) all purchasers are accredited investors under Rule 501 of Regulation D, or the issuer reasonably believes that all purchasers are accredited investors under such rule at the time of the sale.
The final rule provides a non-exclusive list of methods an issuer may use to confirm that a purchaser is an accredited investor. The issuer, for example, may (1) review copies of any IRS form reporting a purchaser’s income and obtain a written representation that the purchaser expects to earn the necessary income during the current year; or (2) obtain written confirmation from a registered broker-dealer, investment advisor, or certified public accountant, that the issuer has taken reasonable steps to confirm the purchaser’s accredited investor status. Issuers conducting Rule 506 offerings without general solicitation and general advertising, however, will not be subject to the new verification requirement.
Moreover, the final rule revises Form D, the required notice issuers file with the SEC when selling securities under Regulation D. The revised Form D includes a separate box for issuers to check if they are relying on the new Rule 506 exemption.
Furthermore, the final rule provides that securities sold under Rule 144A can be offered to persons other than qualified institutional buyers. This is possible if such securities are only sold to persons whom the issuer, and any person acting on behalf of the issuer, reasonably believes to be qualified institutional buyers. An offering of such securities may also occur by means of general solicitation.
Disqualification of Felons and other Bad Actors from Rule 506 Offerings
The SEC also adopted a final rule barring felons and other bad actors from relying on Rule 506, as dictated by Section 926 of the Dodd-Frank Act.
The final rule provides that covered persons who experienced disqualifying events cannot rely on the Rule 506 exemption. Covered persons may include, for example, (1) the issuer, the issuer’s predecessors, and affiliated issuers; (2) directors, executive officers, other officers participating in the offerings, and general partners or managing members of the issuer; (3) 20 percent beneficial owners of the issuer; (4) promoters connected with the issuer; (5) investment managers of pooled investment funds with the issuer; or (6) persons compensated for soliciting purchasers.
Furthermore, the final rule provides that disqualifying events may include, for example, (1) criminal convictions, court injunctions, and restraining orders in connection with the sale of securities; (2) final orders from particular agencies and regulators barring the issuer from associating with entities engaging in the sale of securities; (3) SEC disciplinary orders related to brokers, dealers, etc.; (4) SEC cease-and-desist orders related to violations of particular anti-fraud provisions; (5) SEC stop orders; or (6) suspension or expulsion from membership in a self-regulatory organization.
The final rule, however, provides an exception from the disqualification provision. This exception is applicable when the issuer shows that it neither knew nor could have reasonably known that a covered person, had experienced a disqualifying event, participated in the offer.
In addition, a disqualification may occur only in regards to disqualifying events arising subsequent to the rule’s effective date. Disqualifying events arising prior to the rule’s effective date are subject to a mandatory disclosure requirement to investors.
Proposing Amendments to Private Offering Rules
The SEC further offered a proposal that would enhance its ability to monitor and address market developments in Rule 506 offerings.
Under the proposal, issuers relying on the new Rule 506 opportunity for general solicitation and advertising would be required to file Form D within 15 days prior to engaging in such activities. These issuers would also have to update information contained in Form D and specify that the offering has ended within 30 days after completing the offering.
Additionally, the proposal would expand the information issuers are required to provide on Form D, to include, for example, (1) the issuer’s website; (2) information on the issuer, the offered securities, and the investors; (3) the use of proceeds; (4) the types of general solicitation used; and, (5) the methods used to confirm the investor status of purchasers. The proposal would bar issuers from using a Rule 506 exemption in a new offering if the issuers or their affiliates do not comply with Form D filing requirements. Such a bar would continue for one year following filings of Form D.
The proposal would also require issuers to include legends in general solicitation materials used in Rule 506 offerings. The legends would inform potential investors that such offerings are limited to accredited investors and may entail potential risks. The proposal would further require issuers to submit general solicitation materials to the SEC. This latter requirements would be temporary and expire after two years.
Additionally, the proposal would extend guidance, regarding when information in sales literature by an investment company registered with the SEC could be fraudulent or misleading for purposes of federal securities laws, to the sales literature of private funds regardless of whether the private funds are involved in general solicitation activities.
For more information contact:
Henry Beck, Jr.
Phone: 860.297.4611
Email: beck@halloransage.com