SEC Lifts Ban on General Solicitation in Private Offerings

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The Securities and Exchange Commission approved a proposed rule to lift the ban on general solicitation in offerings conducted under Rule 506 of Regulation D. The amendments to the rule were required by Section 201(a) of the Jumpstart Our Business Startups Act.

Many private issuers (including certain hedge funds, private equity funds and start-up companies) will soon be able to use the internet and other media to solicit investors in a manner that was previously prohibited (absent public offering registration or very narrow exemptions).

Actual sales by issuers that generally solicit will be permitted only to "accredited investors" which are generally defined as: individuals with net worth in excess of $1 million (excluding home equity) or annual income in excess of $200,000 ($300,000 if combined with spousal income), and entities with assets of $5 million or more.

Issuers using general solicitation must file a Form D with the SEC at least 15 days prior to the offering and an amended Form D within 30 days after the offering ceases. Failure to file a Form D can result in the issuer being prohibited from further issuance of securities.

Issuers that choose not to use general solicitation may continue to use Rule 506(b).

Issuers that generally solicit investors under new Rule 506(c) will be required to take "reasonable steps" to verify the "accredited" status of investors. This is a more onerous requirement than current requirements under Rule 506 and will require increased documentation, issuer verification efforts and record keeping.

Read a more detailed discussion of the proposed rule here.

The effective date of amended Rule 506 is sixty days after publication in the Federal Register (publication anticipated sometime next week).