SEC Adopts Rules Lifting Ban On General Solicitation In Private Placement Offerings

The following information concerning new rule amendments just approved yesterday by the Securities and Exchange Commission (SEC) allows companies to engage in general solicitation of investors in private placement offerings.

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"). Section 201(a) of the JOBS Act directed the SEC to revise its rules to provide that the prohibition against general solicitation or general advertising contained in Regulation D shall not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and requiring the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors. Rule 506 is the most widely-used exemption from securities offering registration requirements and significantly more capital is raised through exempt offerings than in registered public offerings.

In 2011, an estimated $849 billion was raised in Rule 506 offerings. We expect that the removal of the ban on general solicitation will substantially increase the amount raised in these offerings.

Congress mandated that the SEC adopt these rule amendments by July 4, 2012. After much political debate regarding the negative effects that many fear these rule amendments will have on investor protections, the SEC approved the rule amendments on July 10, 2013.

What You Need To Know

Soliciting Investors

Since the 1970s, advertising or general solicitation of prospective investors (for example, by publishing information about a private offering on the Internet or in any other communication that is published or broadcast) has not been permitted in private securities offerings until now.

Previously, companies and their agents were required to have a preexisting relationship with prospective investors before they could be solicited to invest in the company, which often requires a company to pay significant fees to a registered broker-dealer to offer the securities to its clients.

Companies will now be able to solicit investors on the Internet or by any other means of general solicitation or advertising if the company takes reasonable steps to verify that all investors are accredited investors. The final rule release notes that eliminating the prohibition against general solicitation will enable companies to solicit potential investors directly, through both physical means (such as mailings, newspaper advertisements and billboards) and electronic means (such as the Internet, social media, email and television).

The final rule amendments also include a non-exclusive list of methods that companies may use to satisfy the accredited investor verification requirement for investors who are natural persons. Comparable rule amendments were also adopted for securities offered to qualified institutional buyers, or QIBs, pursuant to Rule 144A.

IMPORTANT DATES: The rule amendments lifting the ban on general solicitation will become effective 60 days after the final rule release is published in the Federal Register.

Disqualification under Rule 506

Simultaneously, the SEC also adopted rule amendments that were originally proposed in May 2011, which disqualify companies from using Rule 506 if the company or any of its predecessors or affiliates or any director, executive officer, general partner or managing member of the company, any 20% or more security holder of the company or other specified person has certain criminal convictions or has been subject to certain court or governmental agency or self-regulatory organization (SRO) orders (referred to as "bad actors"). The Dodd-Frank Act directed the SEC to adopt these rule amendments by July 21, 2011.

IMPORTANT DATES: The rule amendments disqualifying felons and other "bad actors" from Rule 506 offerings will become effective 60 days after the final rule release is published in the Federal Register.

Additional Proposed Rule Amendments Published for Public Comment  

In connection with these rule amendments, the SEC published for public comment additional proposed rule amendments intended to provide additional investor protections in private placement offerings. These proposals include:

  • Requiring companies that intend to engage in general solicitation as part of a Rule 506 offering to file a Form D at least 15 days before engaging in general solicitation and file an updated Form D within 30 days after completing the offering;
  • Requiring companies to provide additional information, which is not currently required, in Form D about the company and its offering and types of investors;
  • Disqualifying companies from using the Rule 506 exemption if the company failed to file a Form D in connection with a prior Rule 506 offering;
  • Requiring companies to include specific legends or cautionary statements in any general solicitation materials used in a Rule 506 offering;
  • Requiring companies to file with the SEC copies of general solicitation materials, which would not be publicly available; and
  • Imposing specific anti-fraud and disclosure requirements on private funds with respect to their offering documents pursuant to existing Rule 156 (which currently only applies to registered investment companies).

IMPORTANT DATES: The proposed additional rule amendments will be subject to a 60-day public comment period.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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