Removal Of General Solicitation Requirements Triggers Additional SEC Proposals

The SEC has adopted final rules eliminating the ban on general solicitations in Rule 506 offerings.  As a result of the magnitude of the changes, the SEC has proposed a number of amendments in conjunction with the adoption of new Rule 506(c). These amendments:

  • are intended to enhance the SEC’s understanding of the Rule 506 market by improving compliance with Form D filing requirements;
  • expanding the information requirements of Form D, primarily with respect to Rule 506 offerings, and
  • requiring the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission. 

Form D and Regulation D

With respect to Form D and to Regulation D as it relates to Form D, the SEC has  proposed to:

  • amend Rule 503 of Regulation D to require:
    • the filing of a Form D no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering; and
    • the filing of a closing Form D amendment within 30 calendar days after the termination of a Rule 506 offering;
  • amend Form D to require additional information primarily in regard to offerings conducted in reliance on Rule 506; and
  • amend Rule 507 of Regulation D to disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with all of the Form D filing requirements in a Rule 506 offering.

Legends for General Solicitation Material

In addition, in light of the ability of issuers to publicly advertise Rule 506(c) offerings, the SEC is concerned that prospective investors may not be sufficiently informed as to whether they are qualified to participate in these offerings, the type of offerings being conducted and certain potential risks associated with such offerings. To address these concerns, the SEC has proposed a new Rule 509 of Regulation D, which would require issuers to include prescribed legends in any written communication that constitutes a general solicitation in any offering conducted in reliance on Rule 506(c).

The legends would include the following:

  • The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;
  • 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 Commission 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; and
  • Investing in securities involves risk, and investors should be able to bear the loss of their investment.

Hedge Funds, Private Equity Funds and Venture Capital Funds

Legends

Private funds, such as hedge funds, private equity funds and venture capital funds, would also be required to include a legend disclosing certain information:

  • The securities offered are not subject to the protections of the Investment Company Act;
  • If performance data is included:
    • 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; and
    • the performance of the fund may not be directly comparable to the performance of other private or registered funds.

Fees, Expenses and Other Information

The proposed rule would also require the legend to identify either a telephone number or a website where an investor may obtain current performance data.  The SEC also proposed to require private funds that include performance data that does not reflect the deduction of fees and expenses in their written general solicitation materials to disclose that fees and expenses have not been deducted and that if such fees and expenses had been deducted, performance may be lower than presented.

Additional Antifraud provisions Apply

The SEC has also proposed to amend Rule 156 under the Securities Act, which interprets the antifraud provisions of the federal securities laws in connection with sales literature used by investment companies, to apply to the sales literature of private funds because it believes it is important for private funds to consider the SEC’s views on the applicability of the antifraud provisions to their sales literature.

Filing of General Solicitation Materials

As the SEC believes it will need to be aware of developments in the Rule 506 market after the effectiveness of Rule 506(c), the SEC proposed Rule 510T to require issuers, on a temporary basis, to submit any written general solicitation materials used in their Rule 506(c) offerings to the SEC no later than the date of the first use of these materials. The materials would be required to be submitted through an intake page on the SEC’s website. The SEC has not proposed, at this time, that these materials would be available to the public.  Compliance with proposed Rule 510T would not be a condition of Rule 506(c).  Rule 510T is proposed as a temporary rule that will expire two years after the effective date of proposed Rule 510T.