On July 10, 2013, the SEC voted to lift the ban on general solicitation and advertising for offerings limited to accredited investors under Rule 506 and for offerings under Reg. 144A of the Securities Act of 1933. As mandated by the U.S. Congress under the Jumpstart Our Business Startups Act of 2012 (JOBS Act), the SEC voted on July 10, 2013 to approve the lifting of the ban. Also on July 10, 2013, the SEC approved an amendment to Rule 506 to disallow the use of the exemption for offerings involving certain felons and other “bad actors,” and to propose through an amendment to Regulation D to enhance the SEC’s ability to evaluate changes in the private placement market that occur after the lifting of the general solicitation and advertising ban.
Actions on July 10, 2013 by the SEC to adopt the lifting of the general solicitation and advertising ban, the application of the bad actors and certain felon disqualification provisions to Rule 506, and the proposal of an amendment to Reg. D to monitor the implications of lifting the ban are in response to both the congressional mandates and the numerous comments that were received from those opposed and in favor of lifting the ban.
The actions by the SEC to lift the ban and the application of the bad actors and felons disqualification will be effective 60 days from the date these approved regulatory provisions are published in the Federal Register.
The lifting of the ban on general solicitation and advertising for Rule 506(c) offerings is conditioned upon the issuer taking reasonable steps to verify that all purchasers in the offering are accredited investors. For natural person purchasers, that means each such purchaser would be required to have, at the time of purchase, a net worth in excess of $1 million, excluding the value of the purchaser’s primary residence, or an annual income in excess of $200,000 for each of the last two years and a reasonable expectation of having at least that income for the current year (or $300,000 when coupled with the purchaser’s spouse for those same time periods). The issuer of the offering would need to implement steps deemed to be reasonable to verify that each purchaser meets one of the criteria for being an accredited investor. The SEC, within its release for the finalization of the revised Rule 506 and Rule 144A, has listed nonexclusive steps by an issuer that may be deemed “reasonable” for verifying the investor’s status for compliance with the Rule.
Issuers may continue to conduct a private placement offering without utilizing general solicitation and advertising. It is expected that SEC Form D (the form utilized by issuers to report Registration D offerings with the SEC) will be modified so that an issuer will check a box as to whether it has utilized general solicitation and advertising in connection with the reported-on offering. In addition, it is expected that certain issuers who utilize the new Rule will be expected to file the initial Form D with the SEC at least 15 days prior to the conduct of general solicitation or advertising and to file a final Form D within 30 days of the completion of the offering.
Issuers who wish to utilize the new Rule 506(c) exemption, which allows the use of general solicitation and advertising, should work with their securities counsel to adopt procedures reasonably designed to verify that each purchaser is accredited. The failure to take reasonable steps to make such verifications could result in the loss of the exemption for the issuer. Such loss of the the exemption could cause civil and administrative liability under the federal and state securities laws for the issuer and its principals.
The adoption by the SEC of the bad actors and certain felon disqualifications in connection with such offerings was mandated by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SEC adopted this provision which applies to the issuer, any predecessor or affiliated issuers of the issuer, executive officers, and general or managing partners of the issuer and includes other “covered persons” such as any beneficial owners of 20 percent or more of any voting class of the issuer’s securities and any person who will be paid remuneration for solicitation of purchasers in the offering and any director, officer, general partner, or manager of such solicitor. The disqualifying events by such persons include criminal convictions occurring within the past five years for issuers and the past 10 years for other covered persons, final orders of the SEC and state securities, banking, and commodity regulators. Surprisingly, the SEC adopted the disqualifications but only if the triggering event that caused the disqualification occurred after the enactment of the adoption by the SEC of this bad actors disqualification rule provision. Issuers will need to implement a system to ensure that covered persons involved in the offering do not have past records that would disqualify the use of the Rule 506 exemption for the issuer.
Congress intended for the lifting of general solicitation and advertising ban under the JOBS Act to allow start-ups, venture capitalists, hedge funds and other issuers to openly advertise that they are conducting private placement offerings. Although some opposed to lifting the ban fear that it will cause an uptick on fraudulent offerings, it is widely believed that the lifting of the ban is worth the risk, given the opportunity for start-ups, among other issuers, to reach a much-needed public audience for their offerings.
On July 17, 2013, Foley & Lardner LLP will conduct a Web conference regarding the SEC’s actions from July 10, 2013. For further information, see http://www.foley.com/jobs-act-update-sec-acts-to-help-take-the-private-out-of-private-placements/.