Anyone who has studied securities laws has undoubtedly heard of the Supreme Court’s decision in SEC v. Ralston Purina Co., 346 U.S. 119 (1953). In that case, the Supreme Court struggled with the exemption in the Securities Act of 1933 for “transactions by an issuer not involving any public offering” (now in Section 4(2) but then found in Section 4(1)). Yesterday, Congress passed the “Jumpstart Our Business Startups Act“. Assuming that President Obama signs this bill, the JOBS Act will dramatically change the longstanding limitations on private offerings.
In Section 201 of the JOBS Act, Congress orders the Securities and Exchange Commission to adopt rule changes within 90 days to provide that the prohibition against general solicitation or general advertising contained in Rule 502(c) of Regulation D does not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. Issuers, however, will be required to to take reasonable steps to verify that purchasers of the securities are accredited investors, using methods to be determined by the SEC.
Permitting general solicitation of accredited investors is something that I’ve advocated for quite some time. For example, in this comment letter, I argued that the ban on general solicitation has been counterproductive and increased investor risk.
But how does allowing general solicitation square with the fact that Rule 506 is an exemption under Section 4(2) of the Act? Congress explicitly addressed this question by providing that Rule 506 ”shall continue to be treated as a regulation issued under section 4(2) of the Securities Act”.
But what about Ralston Purina? I believe that Congress’ action is consistent with Ralston Purina and the original legislative intent. Mr. Justice Clark did never used the term “general solicitation” in his opinion. Rather he quoted from the legislative history and focused on the purpose of the Securities Act:
The natural way to interpret the private offering exemption is in light of the statutory purpose. Since exempt transactions are those as to which “there is no practical need for [the bill's] application,” the applicability of § 4 (1) [now, § 4(2)] should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction “not involving any public offering.”
In Section 201 of the JOBS Act, Congress has clearly determined that accredited investors are able to fend for themselves and these changes are clearly in harmony with Ralston Purina.