SEC Approves Changes to Private Offering Rules and Adopts New “Bad Actor” Prohibitions; Proposes Additional Changes to Better Monitor Private Offering Market

On July 10, 2013, the U.S. Securities and Exchange Commission (SEC) approved changes to Rule 506 of Regulation D under the Securities Act of 1933 to implement the elimination, mandated by the Jumpstart Our Business Startups (JOBS) Act, of the prohibition against general solicitation or advertising in the offer and sale of securities under Rule 506, provided that all of the purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that status. Also as required by the JOBS Act, the SEC approved amendments to Rule 144A to permit the offer of securities for resale under Rule 144A to persons other than qualified institutional buyers (QIBs) provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBs. The new rules will take effect in mid-September 2013.

The U.S. Congress, in passing the JOBS Act in 2012, felt that the rules relating to private placements had not kept pace with the significant changes in technology and communication that could allow start-ups and small businesses to reach a vastly larger pool of potential investors, and thus were unduly limiting those entities’ ability to raise private capital, grow their businesses and hire more employees. Neither the JOBS Act itself nor the SEC’s implementing rules, however, confine the new availability of public solicitation in Rule 506 offerings to start-ups and small businesses. In particular, public solicitation will now be permitted by private investment funds, which a recent SEC study found to be the principal current users of Rule 506.

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