07/16/2013

SEC Adopts Rule Permitting General Solicitation in Private Placements and Proposes New Reg D Requirements

Summary

On July 10, 2013, the SEC adopted new rules under Section 201(a) of the JOBS Act, repealing the ban on general solicitation in all Rule 144A offerings and certain Rule 506 transactions. The SEC action:

      1. Adopted final rules to repeal the ban on general solicitation in all Rule 144A offerings and certain Regulation D transactions, as required by Title II of the JOBS Act;

      2. Adopted final rules to disqualify “bad actors” from participating in Regulation D Rule 506 offerings, as required by Section 926 of Dodd-Frank; and

      3. Proposed new Regulation D requirements. If adopted, the proposed rules would:

    • impose filing requirements that could have a chilling effect on some market participants’ willingness to use general solicitation under new Rule 506(c); and

    • effectively penalize an issuer for not filing a Form D in a Rule 506 offering.

Detailed Discussion

General Solicitation Ban Repealed



The SEC adopted rules to implement Section 201(a) of the JOBS Act, repealing the ban on general solicitation in all Rule 144A offerings and certain Rule 506 transactions. The final rules are substantially similar to those proposed in August 2012, and will take effect 60 days from the date of publication in the Federal Register.



Most relevant for Pierce Atwood clients, new Rule 506(c) permits the use of general solicitation if:

      1. The issuer takes “reasonable steps to verify” that purchasers are accredited investors;

      2. All purchasers are accredited investors, either because they fall within the accredited investor definition or the issuer reasonably believes that they do at the time of the sale; and

      3. All requirements of Rules 501 (definitions), 502(a) (integration) and 502(d)(resale restrictions) are met

The new Rule 506(c) leaves the “reasonable steps to verify” determination flexible. Whether the verification steps taken by the issuer are reasonable will depend on the facts and circumstances of each offering. The SEC suggested that some relevant factors include:

      1. The nature of the purchaser and the type of accredited investors;

      2. The amount and type of information that the issuer has about the purchaser; and

      3. The nature of the offering, including for example:

              • the manner in which the purchaser was solicited to participate in the offering, and ?

              • the terms of the offering.

 

The new rule includes specific non- exclusive methods of verifying accredited investor status, including:

      1. When verifying whether an individual meets the accredited investors income test, reviewing certain recent IRS forms and obtaining a written representation from the individual;

      2. When verifying whether an individual meets the accredited investors net worth test, reviewing certain bank, brokerage and similar documents and obtaining a written representation from the individual; and

      3. Obtaining written confirmation from an SEC registered broker-dealer or investment adviser, a licensed attorney or a CPA that has itself taken reasonable steps to verify that the purchaser is an accredited investor.

The rule changes affect only the Rule 506 safe harbor, not other private offerings under Section 4(a)(2) (formerly Section 4(2)). The SEC did not address private resales under Section 4(1½).

The SEC confirmed that privately offered pooled investment vehicles relying on the qualified purchaser (Section 3(c)(7)) or 100-holder (Section 3(c)(1)) exclusions under the Investment Company Act of 1940 may engage in general solicitation under Rule 506(c).

Rule 144A Revisions

The new rules revise Rule 144A to make it available even where general solicitation has occurred. Rule 144(d)(1) requires simply that securities must be sold to QIBs. As a result, Rule 144A will be available even where general solicitation has occurred.

Bad Actor Disqualification Adopt

Rules were adopted to implement the ban of Section 926 of Dodd-Frank on the participation by “bad actors” in Rule 506 offerings, including offerings using general solicitation under new Rule 506(c). Under the new rules, an issuer will not be able to rely on Rule 506 if certain individuals or entities (including directors and officers who participate in the offering) have been subject to a disqualifying event such as a conviction for securities fraud. Triggering events that occurred prior to the effectiveness of the new rules will not count, though they will be subject to mandatory disclosure. An issuer may nevertheless be able to rely on Rule 506 if it can demonstrate that it did not know and, in the exercise of reasonable care could not have known, that a disqualifying event existed.

Proposed Rules

The SEC proposed rules to expand the requirements of Regulation D. In particular, under the proposal:

      1. Revised Rule 503 would require the filing of Form D information no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering.

      2. Revised Rule 503 would require the filing of a closing amendment to Form D within 30 calendar days after terminating any Rule 506 offering.

      3. New Rule 509 would require prescribed legends in any general solicitation in written form in a Rule 506(c) offering. Private funds under the Investment Company Act would also be required to include an additional legend and certain disclosures.

      4. New Rule 510T would require issuers to submit any written general solicitation materials used in Rule 506(c) offerings to the SEC no later than the date of first use of these materials.

      5. Revised Rule 507 would disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer or its affiliates did not comply, within the prior five years, with all the Form D filing requirements in a Rule 506 offering. The five-year period would not, however, extend to non-compliance that occurred prior to the effective date of the new rule.