SEC Issues Proposed Rules Intended to Protect Investors and Gather Additional Information in Connection With Permitting General Solicitation

by Ryley Carlock & Applewhite

On July 10, 2013, the Securities and Exchange Commission ("SEC") issued proposed rules regarding amendments to Regulation D, Form D and Rule 156 of the Securities Act. The SEC has requested comments on the proposed rules.

Regulation D

In order to implement Section 201(a)(1) of the Jumpstart Our Business Startups Act (the "JOBS Act"), the SEC will add paragraph (c) to Rule 506 to permit the use of general solicitation and general advertising. Thus, a 506(c) offering refers to a private offering that utilizes some form of general solicitation. Under the SEC rules, general solicitation is allowed so long as all purchasers are accredited investors and the issuer takes reasonable steps to verify that all purchasers are accredited investors.

Advance Form D. The SEC's proposed rules require the filing of a Form D in Rule 506(c) offerings before the issuer conducts an offering using general solicitation. The Form D must be filed no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering. This advance Form D filing only requires selected Items from Form D. Thus, an issuer filing an advance Form D will also need to file an amendment with the additional Form D Items within 15 calendar days after the date of the first sale of securities in the offering.

Closing Form D. The proposed rules also require the filing of a closing amendment to Form D in all Rule 506 offerings. The closing Form D amendment must be filed within 30 calendar days after the termination of a Rule 506 offering.

Legends. The proposed amendments to Regulation D mandate legends and disclosures on the written general solicitation materials. Proposed new Rule 509 prescribes the new legends. The following prominent legends must be included in ALL written general solicitation materials:

  • The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;
  • The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;
  • The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;
  • The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the securities; and
  • Investing in securities involves risks, and investors should be able to bear the loss of their investment.

Submission of Written General Solicitation Materials. Issuers will also be required to file the written general solicitation materials used in Rule 506(c) offerings. Proposed new Rule 510T requires issuers, on a temporary basis for two years from the effective date, to submit to the SEC any written general solicitation materials used in a 506(c) offering, not later than the date of the first use of the materials. These materials would NOT be available to the general public and would not be "filed" through the SEC's EDGAR system.

Disqualification. The proposed amendments will disqualify any issuer from relying on Rule 506 for one year for future offerings, if the issuer, or any predecessor or affiliate, did not comply with the Form D filing requirements in the last five years in a Rule 506 offering. This disqualification would only apply to future offerings, is subject to a cure period and a waiver provision, and will not apply until the proposed amendments become effective. The proposed rules include a cure period of 30 calendar days for the failure to timely file any Form D or Form D amendment. The cure period would only be available for the issuer's first failure to timely file for a particular offering. Issuers would also be able to apply for a waiver from the SEC.

The SEC also proposes that an issuer would be disqualified from relying on Rule 506 for future offerings if the issuer, or any predecessor or affiliate, has been subject to any order, judgment or court decree enjoining the person for failure to comply with proposed Rule 510T.

The SEC further proposes that any issuer would be disqualified from relying on Rule 506 for future offerings if the issuer, or any predecessor or affiliate, has been subject to any order, judgment or court decree enjoining the person for failure to comply with proposed Rule 509.

The SEC also proposes that any issuer would be disqualified from relying on Regulation D if the issuer, or any predecessor or affiliate, has been subject to any order, judgment or decree of any court of competent jurisdiction temporarily, preliminary or permanently enjoining the person for failure to comply with Rule 503 (primary requirements of Regulation D).

Form D

Form D is the notice of a private offering filed with the SEC through the EDGAR system. The proposed amendments add more required information to Form D for Rule 506 offerings and for Rule 506(c) offerings. Here are some of the proposed changes to Form D:

  • A new check box for issuers relying on Rule 506(c) (newly adopted);
  • Item 2 - this Item will be amended to include the issuer's website address;
  • Item 3 - this Item will be amended to require, when the issuer is conducting a Rule 506(c) offering, the name and address of any person who directly or indirectly controls the issuer;
  • Item 4 - this Item will be amended to require any issuer selecting "Other" under industry group to complete a clarification field;
  • Item 5 - this Item will be amended to replace the "Decline to Disclose" option with a "Not Available to Public" option in response to the issuer size question;
  • Item 7 - this Item would be amended to add separate check boxes for advance Form Ds and closing amendment Form Ds;
  • Item 9 - this Item would be amended to include, to the extent applicable, the trading symbol and generally available security identifier for the offered securities;
  • Item 14 - this Item would be amended to include a table for Rule 506 offerings showing the number of accredited and non-accredited investors and whether they are natural persons or legal entities, and the amount raised from each category of investor;

For offerings under
Rule 506 only

  Natural Persons  Legal Entitles
Accredited Investors Number    
  Amount Raised ($)    
 Non-accredited Investors Number     
  Amount Raised ($)    
  • Item 16 - this Item will be amended to require information about the percentage of the offering proceeds from a Rule 506 offering that will be used: (a) to repurchase or retire the issuer's existing securities; (b) to pay offering expenses; (c) to acquire assets, other than in the ordinary course; (d) to finance the acquisitions of other businesses; (e) for working capital; and (f) to discharge indebtedness;
  • New Item 17 - this new Item requires that the issuer specify the number of purchasers who qualified as accredited investors on the basis of: (a) income; (b) net worth; (c) director, executive officer or general partner of issuer or its general partner; and (d) other basis;
  • New Item 18 - this new Item requires the name of the trading venue if the issuer's securities are traded on national securities exchange, alternative trading system or any other organized trading venue, the SEC file number if a class of the issuer's securities is registered under the Securities Exchange Act of 1934 and a check box if the securities being offered in reliance on Rule 506 are of the same class of securities or are convertible into or exercisable or exchangeable for the class of securities;
    • New Item 19 - this new Item requires that the issuer indicate whether general solicitation materials were filed with the Financial Industry Regulatory Authority ("FINRA"), if the issuer used a registered broker-dealer in connection with the offering;
    • New Item 20 - this new Item applies to pooled investment funds, which must indicate the name and SEC file number for each registered investment adviser or exempt reporting adviser that functions directly or indirectly as a promoter of the issuer;
    • New Item 21 - this new Item requires that with respect to Rule 506(c) offerings, issuers must indicate each type of general solicitation and general advertising to be used; and
    • New Item 22 - this new Item requires that with respect to Rule 506(c) offerings, issuers must indicate each method to be used to verify accredited investor status.

Rule 156 and Private Funds

Sales Literature of Private Funds. The proposed amendments extend Rule 156 to apply to ALL private funds. Under the proposed rules, Rule 156 interpretations of the antifraud provisions of the federal securities laws will apply to the sales literature of private funds.

Legend. Because Rule 506(c) will allow private funds (hedge funds, venture capital funds and private equity funds) to engage in general solicitation without loosing exclusions from the Investment Company Act, an additional legend would be required. Under the proposed rules, private funds must include a legend on any written general solicitation materials disclosing that the securities being offered are not subject to the protections of the Investment Company Act of 1940.

Additional Disclosures for Performance Data. Under new Rule 509(c), private funds that include performance data in any written general solicitation materials will be required to include additional disclosures. The legend on the materials must disclose:

  • performance data represents past performance;
  • past performance does not guarantee future results;
  • current performance may be lower or higher than the performance data presented;
  • the private fund is not required by law to follow any standard methodology when calculating and representing performance data; and
  • the performance of the private fund may not be directly comparable to the performance of other private or registered funds. The private fund must also include a telephone number or website where an investor can obtain current performance data. The SEC also proposes that performance data that does not reflect the deduction of fees and expenses in any written general solicitation materials must indicate that performance may be lower than presented.

What You Need To Know

The SEC's proposed rules are part of a comprehensive approach to gather more information about Rule 506(c) offerings to allow the SEC to balance the goals of investor protection and capital formation. The proposed rules will increase the costs and time required to prepare Form Ds in connection with Rule 506 offerings.

Some lawmakers have suggested that the proposed rules may be inconsistent with the JOBS Act. Thus, the SEC may consider changes during the comment period. The comment period was reopened until November 4, 2013.


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.

© Ryley Carlock & Applewhite | Attorney Advertising

Written by:

Ryley Carlock & Applewhite

Ryley Carlock & Applewhite on:

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