|April 19, 2012|
Previously published on April 2012
A provision of the new JOBS Act will ease the restrictions on advertising and general solicitation to allow small businesses to locate a larger number of accredited investors and more efficiently raise capital in Rule 506 offerings.
On April 5, 2012, President Obama signed the Jumpstart our Business Startups Act recently approved by Congress (the "JOBS Act"). A key provision of this new law reduces the restrictions on advertising and other general solicitation activities in private placement offerings to accredited investors under Rule 506 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Since the credit crisis of 2008 reduced the availability of bank financing, private placement offerings made pursuant to Rule 506 have been the major source of funding for small businesses. Rule 506 presently restricts the use of general solicitation such as advertisements, speaking engagements and the internet in locating investors for a Rule 506 offering. This leaves the small business owner with the choice of either offering and selling securities to unaccredited investors, which has much more costly disclosure requirements, or limiting the offering to the accredited investors known to the business owner, which is often a very limited group that makes it very difficult to raise the required funds. The policy goal of this aspect of the statute is to ease the restrictions on advertising and general solicitation to allow small businesses to locate a larger number of accredited investors and more efficiently raise capital in Rule 506 offerings.
Section 201(a) of the JOBS Act requires the Securities and Exchange Commission (the "Commission") to revise Rule 506 within 90 days to provide that the prohibition on general solicitation or general advertising shall not apply to offers and sales of securities made solely to accredited investors pursuant to Rule 506. The new rules will require issuers to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. In addition, the Commission is also required to revise Rule 144A(d)(1) under the Securities Act to provide that securities sold under such revised exemption may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer.
The statute explicitly states that offers and sales exempt under Rule 506 as revised shall not be deemed public offerings under federal securities laws as a result of general solicitation or general advertising efforts used in such offerings to locate investors. Section 201(c) of the JOBS Act provides an exemption from registration as a broker or dealer pursuant to section 15(a)(1) of the Securities Exchange Act of 1934, as amended, solely because a vendor (i) maintains a securities platform or mechanism that permits activities such as the offer and sale of securities or general solicitation or general advertising by issuers of such securities, (ii) co-invests in such securities or (iii) provides ancillary services such as due diligence or the provision of standardized documents, provided that such vendor:
- receives no compensation in connection with the purchase and sale of such securities;
- does not have possession of customer funds or securities in connection with the purchase or sale of the securities; and
- is not subject to a statutory disqualification.