In early July, the SEC commissioners voted to eliminate a long-standing rule that prohibited general solicitation of investors and thereby will allow business entities greater leeway to advertise private offerings. The SEC’s ban on general solicitation for private securities offerings has been in place for more than 80 years and has served to prohibit essentially all public advertising of private investment offerings. The SEC’s elimination of this rule will provide an opportunity for businesses that raise money through private offerings to reach more potential investors. Since nearly $1 trillion is raised annually through private offerings, this is a significant rule change. The rule, however, does come with significant restrictions that make compliance with securities regulations paramount for private offerors of securities.
THE JOBS ACT EASED RESTRICTIONS ON CAPITAL FORMATION
The impetus for this rule change stems from the JOBS Act which was passed in 2012 to spur economic growth, partly by easing restrictions on capital formation by business entities. One provision of the JOBS Act compelled the SEC to change the rule that prohibited general solicitation of private investment offerings. Pursuant to this provision, the SEC commissioners first proposed a rule last year, and have now approved it by a 4-1 vote, that formally eliminates the prohibition on general solicitation. The rule change will officially take effect sometime later this year (after a waiting period of at least 60 days).
MORE LEEWAY (BUT IMPORTANT RESTRICTIONS)
This rule change opens the door for private issuers of securities to advertise their private securities offerings. Issuers who intend to use advertising in this way, though, should be aware that certain restrictions adhere to the new leeway. One important restriction is that only investors who qualify as “accredited investors” will be permitted to invest in these offerings. (Accredited investors have a net worth of at least $1 million excluding the value of their primary residence or an annual income for the previous two years of at least $200,000 or $300,000 with their spouse.) Compliance with this restriction is important because the issuer has the burden to establish that they have a reasonable basis to believe that each investor qualifies as an accredited investor and only certain verification methods will suffice to furnish a reasonable basis to form such belief. Issuers will also be required to make certain notification filings with the SEC in a certain timeframe prior to commencing solicitation. The SEC will also not allow felons and “bad actors” (which essentially means, in this context, a person who has been sanctioned in some way for running afoul of securities laws), or businesses with personnel who are felons or bad actors, to engage in solicitation. Other restrictions also apply to issuers in these circumstances and compliance with each of the relevant rules and restrictions is important to protect the issuer.
NEW OPPORTUNITIES & ONGOING CHANGES
While the rule change provides a new opportunity for businesses to reach a wider pool of investors, the SEC commissioners concurrently voted to begin the rulemaking process for additional rules that could lead to more onerous reporting requirements for private issuers. The legal environment related to private offerings is clearly in a state of change and additional important rule changes are likely to follow.
We are always apprised of the ongoing changes to the regulatory framework that governs private offerings and we help ensure compliance for numerous clients who raise capital through private offerings.