SEC Amends Rules 506 and 144A to Permit General Solicitation and Advertising in Unregistered Securities Sales


As directed by the Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, the Securities and Exchange Commission recently adopted amendments to Securities Act Rules 506 and 144A, to permit general solicitation and advertising in connection with unregistered sales of securities, in limited circumstances.

Rule 506, a safe harbor exemption from registration for offers and sales of securities by an issuer not involving any public offering, previously prohibited general solicitation and advertising, for example, in newspapers, on radio or TV, or over the Internet. As amended, the rule permits general solicitation and advertising if sales of the securities are limited to accredited investors and the issuer has taken "reasonable steps to verify" that the purchasers are accredited investors. In the SEC's view, an issuer taking reasonable steps to verify that a purchaser is an accredited investor does not lose the exemption by selling to a non-accredited investor that falsely claimed to be accredited.

Whether the issuer has taken reasonable steps depends on the facts and circumstances in each case, including the category of accredited investor the purchaser claims to be, the information about the purchaser available to the issuer, and the nature and terms of the offering. An issuer would not be entitled to rely on only a check-the-box response by an investor.

The amended rule describes four non-exclusive, non-mandatory methods of verifying an individual's status as an accredited investor:

Basis for establishing status   Documentation
Income     IRS reporting forms, including W-2, 1099, K-1, and Form 1040, for previous two years, and written representation by purchaser regarding current year
Net worth  Bank, brokerage statements, tax assessments, third-party appraisals regarding assets, and credit report from national agency regarding liabilities, each dated within last three months; and written representation by purchaser that all liabilities have been disclosed
Third-party confirmation  Written confirmation from registered broker-dealer or investment adviser, attorney, or CPA of purchaser's accredited investor status within last three months
Pre-amendment investor  With respect to post-amendment offerings using general solicitation or advertisement, issuer may rely on written representation of accredited investor in issuer's pre-amendment offering that investor continues to be accredited

Companies may continue to sell securities without general solicitation or advertising under Rule 506 to persons who are or are "reasonably believe[d]" to be accredited investors and to a limited number of non-accredited investors. Form D is being amended so that a company filing the form in connection with a Rule 506 offering will indicate whether the offering is made with or without general solicitation.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC also amended Rule 506 to make it unavailable to an issuer (regardless whether general solicitation is used) if, after the effective date of the amendment, the issuer or a related party is convicted of a crime or becomes subject to a court or regulatory order relating to violations of securities, banking, or insurance law or mail fraud. Issuers conducting a Rule 506 offering must disclose any of these events occurring before the effective date of the amendment.

The SEC also amended Rule 144A, a safe harbor for unregistered resales of securities, to permit general solicitation and advertising of Rule 144A offerings, as long as sales are limited to persons reasonably believed to be qualified institutional buyers.

The amendments become effective September, 2013.

Concurrent with these amendments, the SEC proposed additional amendments to regulations relating to Rule 506 offerings to:
• Require a Form D notice of sale to be filed at least 15 days before using any general solicitation;
• Require filing a closing amendment to Form D after completing a Rule 506 offering;
• Prohibit reliance on Rule 506 for offerings following an offering for which Form D was not filed;
• Require additional information in Form D;
• Require legends in Rule 506 general solicitation material;
• Regulate private fund Rule 506 general solicitation material; and
• Temporarily require submission to the SEC of Rule 506 general solicitation material.

Circular 230 Disclosure: To assure compliance with Treasury Department rules governing tax practice, we inform you that any advice (including in any attachment) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.

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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