On August 29, 2012, the Securities and Exchange Commission (the “SEC”) proposed rules to eliminate the prohibition against general solicitation and advertising in certain unregistered securities offerings. These rules are mandated by the Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law on April 5, 2012, and is intended to, among other things, give issuers the ability to communicate more freely to attract capital. The SEC is seeking public comment on the proposed rules for 30 days, and thereafter the SEC will determine whether, and with what revisions, if any, to adopt the proposed rules.
Issuers seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the SEC’s exemptions from registration prohibit issuers from engaging in general solicitation or advertising, such as advertising on the internet or in print media, in connection with securities offerings. The JOBS Act directs the SEC to revise Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to permit general solicitation or general advertising in unregistered offerings, provided that the issuer reasonably believes that all purchasers (but not all offerees) are accredited investors, or qualified institutional buyers (“QIBs”), in the case of Rule 144A.
Under the proposed rules, new Rule 506(c) would permit the use of general solicitation and advertising to offer securities if the following conditions are satisfied:
- The issuer takes reasonable steps to verify that the purchasers are accredited investors.
- All purchasers are accredited investors, either because they qualify as such under the existing rules (1) or the issuer reasonably believes that they do at the time of the sale of the securities.
- All other applicable conditions of Regulation D are satisfied.
The proposed rules do not specify what is necessary to satisfy the requirement that the issuer has taken reasonable steps to verify that purchasers are accredited investors, which is the key to permitting general solicitation and advertising. Rather, the SEC said that issuers are to consider the facts and circumstances of each transaction. The SEC provided a non-exclusive list of factors to be considered, including, the type of purchaser and the type of accredited investor that the purchaser claims to be, the amount and type of information that the issuer has about the purchaser, the manner in which the purchaser was solicited to participate in the offering and the nature and terms of the offering, such as a minimum investment amount.
The proposed rules would also amend Form D, which issuers must file with the SEC when they sell securities pursuant to Regulation D. The revised Form D would add a new check box for issuers to indicate whether they are relying on the new Rule 506(c) exemption that would permit general solicitation and advertising.
The proposed rules preserve the existing exemption to offer unregistered securities without any general solicitation or advertising, in which case an issuer can sell securities to up to 35 sophisticated non-accredited investors, and can sell to accredited investors relying on their self-certification and the issuer will not be subject to the new verification requirement.
Under the proposed rules, securities sold pursuant to Rule 144A could be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe is a QIB.
(1) Under existing rules, a natural person qualifies as an accredited investor if he or she has individual net worth (or joint net worth with a spouse) that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Or, if he or she has income exceeding $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000 for those years) and a reasonable expectation of the same income level in the current year.