SEC Proposes JOBS Act Amendments To Rule 506 And Rule 144A To Remove Ban On General Solicitation

by Foley Hoag LLP

[authors: Dean F. Hanley and Paul Bork]

On August 29, 2012, the Securities and Exchange Commission released proposed amendments to Rules 506 and 144A in order to remove the prohibition on general solicitation and general advertising in Rule 506 and 144A offerings, as directed by the recently enacted JOBS Act. The SEC says it will accept comments on the proposed rules for 30 days.

The JOBS Act directed the SEC to create a new exemption under Rule 506 in order to allow an issuer relying on Rule 506 to offer securities through general solicitation or general advertising so long as the issuer takes “reasonable steps” to verify that all of the purchasers are accredited investors. Similarly, the JOBS Act directed the SEC to provide that sellers relying on Rule 144A may offer securities through general solicitation or general advertising so long as the seller “reasonably believes” that all of the purchasers are qualified institutional investors (QIBs).

Rule 506

In order to implement the changes to Rule 506, the SEC has proposed to add a new subsection (c), while leaving the rest of the existing Rule 506 intact. Under the new Rule 506(c), an issuer may use general solicitation or general advertising to offer and sell securities, provided that the following conditions are met:

  • the issuer takes reasonable steps to verify that all purchasers are accredited investors
  • all purchasers are accredited investors, or the issuer reasonably believes they are, at the time of the sale of securities; and
  • all terms and conditions of Rule 501 (definitions) and Rules 502(a) (integration) and 502(d) (restrictions on resale) are satisfied.
To the dismay of many, the SEC declined to establish what specifically will constitute “reasonable steps,” instead indicating that each transaction would be judged based on the facts and circumstances. Some of the factors that an issuer must consider when determining the reasonableness of the steps taken to verify accredited investor status include the nature of the purchaser, the amount and type of information that the issuer has about the purchaser, and the nature of the offering. While the proposed rules do not mandate the exact steps an issuer must take, it is clear that an issuer relying on Rule 506(c) will need to undertake some affirmative action to verify accredited investor status. It is unlikely that a representation from a purchaser regarding its status as an accredited investor will be sufficient.

The proposed rules preserve the current Rule 506(b), thereby apparently allowing issuers to continue to conduct Rule 506 offerings without taking “reasonable steps” to verify a purchaser’s accredited investor status, so long as no general solicitation or general advertising is involved in the offering. Currently, an issuer claiming an exemption from registration under Rule 506 must file a Form D and must indicate that it is relying on Rule 506 under Item 6 of the form. In order to distinguish between an offering relying on Rule 506(b) and an offering relying on Rule 506(c), the SEC has proposed amending Item 6 of Form D to eliminate the 506 checkbox, and in its place include both a 506(b) and a 506(c) checkbox.

Although eliminating the prohibition on general solicitation and general advertising in connection with Rule 506 offerings may create new opportunities for companies seeking capital, any issuer relying on the new Rule 506(c) should be cautious because Section 4(a)(2) − the new designation of former Section 4(2), the classic “private placement” exemption − will not be available as a fallback. Under the current Rule 506, if an issuer attempts to rely on Rule 506 but fails to meet all of the elements, the offering may still be exempt from registration under Section 4(a)(2), which exempts offerings that do not involve any public offering. In contrast, an offering made using general solicitation that does not qualify under new Rule 506(c) because of a failure to satisfy the accredited investor test will not be exempt from registration under Section 4(a)(2), at least not as that section has been interpreted by courts and practitioners for 79 years.

Rule 144A

The SEC has proposed to amend Rule 144A by removing any reference to “offer” or “offeree” in subsection (d)(1), which will effectively permit general solicitation and advertising in connection with Rule 144A offerings. Any seller relying on Rule 144A, whether they conduct the offering through general solicitation or not, will continue to have to reasonably believe that all purchasers are QIBs. The SEC has not proposed any changes to subsections (d)(1)(i)-(iv) of Rule 144A, which is a non-exclusive list of methods of establishing whether a purchaser is a QIB.

Some Possible Problems

Many practitioners feel that the SEC should have provided a real safe harbor about what constitutes a “reasonable basis” for believing that an investor is accredited. Without that certainty, issuers may not be willing to take a chance with their interpretation, which could limit use of 506(c), except in situations that are absolutely clear. Correspondingly, legal counsel are unlikely to be willing to give clean securities opinions on Rule 506(c) transactions because compliance with the rule will be a “facts and circumstances” test. Additionally, will courts accept that idea that selling to accredited investors in a Rule 506(c) transaction calls for a different, and tougher, standard than in a Rule 506(b) transaction? Will an unintended effect of the JOBS Act be to require a reasonable basis in Rule 506(b) transactions as well, and will this curtail the use that subsection?

Last, but surely not least, consumer groups worry that permitting general solicitation will result in a proliferation of fraudulent offerings by less than scrupulous issuers who will take an expansive view what is meant by a “reasonable basis” for believing that an investor is accredited. Their fear is that shoddy securities will find their way to barely vetted, unsophisticated investors.


Written by:

Foley Hoag LLP

Foley Hoag 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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 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:

- 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.