Still Banned: General Solicitation in Rule 506 Offerings

by Sheppard Mullin Richter & Hampton LLP
Contact

Ten months have passed since the SEC proposed rules implementing the requirement of Title II of the JOBS Act that the prohibition against general solicitation and general advertising in Rule 506 be eliminated. Those proposed rules were issued nearly two months after the 90 day deadline in the JOBS Act for final rules dealing with this matter. Since the publication of these proposed rules, the SEC has gone through two Chairpersons, neither of whom moved the ball forward. Thus, despite the requirements of the JOBS Act, an issuer conducting an offering pursuant to Rule 506 still cannot generally solicit people to find out (a) whether they meet the requirements for accredited investors and (b) if so, whether they would be interested in making an investment in the issuer.

There were, as well, structural issues with the proposed rules. For legal practitioners, one of the best parts of Rule 506 is that it is a “safe harbor” – you meet the clear, objective requirements, you get the benefit of the exemption. The proposed rules, on the other hand, did not establish such clear, objective requirements for being able to rely on the newly created “506 plus” offering that would allow issuers to engage in a private placement that used general solicitation.

Other criticisms about the proposed rule have come from both sides of the aisle.

On the investor protection side, the SEC Investor Advisory Committee issued proposed additional investor protections to the proposed rules that were backed by various consumer groups. These recommendations included requiring that all solicitation material used by an issuer in the Rule 506 offering be furnished to the SEC and that additional disclosures be made by the issuer on a either new Form GS or an enhanced Form D. Furthermore, in an article in the New York Times, Steve Rattner (who counseled the Treasury in connection with auto industry bailout) suggested that there be some sort of standardized disclosure for private equity and hedge funds using general solicitation in connection with a Rule 506 offering.

On the issuer side, complaints were raised that the proposed rule imposed too many burdens on small businesses trying to raise capital. For example, in its supplementary comment letter to the SEC on the proposed rule, the National Small Business Association pointed to the legislative history of the JOBS Act on this subject (what little there was) and argued that all Congress was asking the SEC to do was to simply eliminate the ban on general solicitation for Rule 506 offerings, and nothing else.

So what are the tea leaves telling us about what the SEC is going to do about the requirement of the JOBS Act that the ban on general solicitation for Rule 506 offerings be eliminated?

Will the SEC do nothing? That’s a distinct possibility. There are several provisions of Dodd-Frank (passed years before the JOBS Act) that the SEC still has not acted on. For example, the so-called “bad boy” provisions (found in Rule 262 in Regulation A) were supposed to be added to the requirements for an issuer that is using Rule 506. This seemingly very simple requirement has not been made into a final rule by the SEC to this day – after it issued proposed rules over two years ago. Is the elimination of the ban on general solicitation to be ignored the same way?

Will the SEC adopt the proposed rule as is without amendment? Given the amount of commentary that was received by the SEC on the proposed rule, this would seem to be unthinkable. Yet, Bloomberg reported recently that Chairperson Mary Jo White “has suggested the commission pass the existing plan without major changes and add protections later.”

Given that they have received numerous comments on the proposed rule and have had almost a year to ruminate on them, will the SEC issue a final rule that addresses these comments and provide a workable safe harbor exemption? One can only hope.

Written by:

Sheppard Mullin Richter & Hampton LLP
Contact
more
less

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.