SEC Eliminates Ban on General Solicitation in Private Offerings

by Miller & Martin PLLC
Contact

On July 10, 2013, the SEC took the following actions that are likely to have a significant impact on hedge funds, private investment funds and other companies that raise capital through private offerings of securities:
(1) adopted rules to repeal the prohibition against general solicitation and advertising in securities offerings in which all purchasers are accredited investors under Rule 506 of Regulation D,
(2) adopted rules to disqualify offerings under Rule 506 that involve certain felons and other “bad actors,” and
(3) proposed rules that would:
-  require additional filings at least 15 days before general solicitation begins and within 30 days after completion of the offering
-  if filings are not made, disqualify future offerings from reliance on Rule 506.
The rules adopted should become effective in about two months.  It is not clear when the proposed rules might become effective.
Repeal of ban on general solicitation:
By allowing advertising of private offerings, the new rules could give companies access to a much larger group of potential investors.
General solicitation will be allowed in Rule 506 offerings, if the issuer complies with the other applicable requirements of Regulation D, and:
-  The issuer takes reasonable steps to verify that each investor is an accredited investor, and
-  Either (1) each investor actually is an accredited investor, or (2) the issuer reasonably believes that each investor is an accredited investor.
“Reasonable steps to verify” is not defined, but the nature of each purchaser and transaction may determine what steps are reasonable.  The SEC set out a non-exclusive list of steps that will satisfy the requirement, including:
 -  reviewing any IRS document that reports income and obtaining representations about expected income
 -  reviewing bank, brokerage or similar statements and obtaining representations that liabilities have been disclosed
 -  obtaining representations from registered broker-dealers or investment advisers, licensed attorneys or CPAs that they have confirmed accredited investor status
 -  for investors in an issuer’s previous offerings under Rule 506 who are natural persons and continue to hold securities, obtaining certifications from the investor.
Addressing a concern for private funds that rely on exclusions from the definition of “investment company” under the Investment Company Act that prohibit public offerings, the SEC confirmed that offerings conducted in compliance with the new rules will not jeopardize these exclusions.
Bad actor disqualification:
An issuer will not be able to rely on Rule 506 if certain persons involved with the company or the offering (including directors, executive officers, officers participating in the offering, general partners, managing members, 20% beneficial equity owners, promoters, placement agents and, for investment funds, their investment managers and controlling persons) have been subject to a “disqualifying event” since the effectiveness of the new rules. Disqualifying events occurring in the past might require disclosure to investors.  A “disqualifying event” includes a conviction of securities fraud and other violations relating to securities offerings, investment activities and filings with the SEC.
If an issuer can show that it did not know and, with the exercise of reasonable care, could not have known of a disqualifying event, it can still rely on Rule 506.
Proposed rules:
The SEC proposed new requirements and limitations that, if adopted, would apply to offerings under Regulation D, including:
-  A Form D must be filed with the SEC 15 at least days prior to any general solicitation.
-  An amended Form D must be filed with the SEC within 30 days after the completion of the offering.
- The Form D must include information about the securities, the investors, the intended use of proceeds, the types of general solicitation and the methods of verification.
- Failure to file the required forms would disqualify the company from reliance on Rule 506 for one year after the delinquent filing is made.
- General solicitation materials must be submitted to the SEC on a confidential basis (this rule, intended to gather information, would expire after two years).
- Additional legends and disclosures, for all issuers, but for private funds in particular, would be required in materials distributed to investors.
The proposed rules have generated controversy within the SEC and among commentators, and the SEC has asked for input on several aspects of the proposed rules.  As a result, it’s too early to predict when new rules might become effective or whether there will be changes to the rules as proposed.
Current rule still available:
The exemption under existing Rule 506, for offerings without general solicitation to accredited investors and up to 35 non-accredited investors, has not changed and can still be used.
To do now:
Hedge funds, private investment funds and other companies that foresee a need to raise additional capital should consider whether they already have a relationship with investors who can provide the needed capital.  If not, and assuming rules similar to those proposed will be adopted, companies should consider whether the additional disclosure, advance filing and verification requirements are an acceptable price to pay for opening their offerings up to a broader group of investors.

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.

© Miller & Martin PLLC | Attorney Advertising

Written by:

Miller & Martin PLLC
Contact
more
less

Miller & Martin PLLC 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.
Custom Email Digest
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.