|September 26, 2012|
Previously published on September 20, 2012
On August 29, 2012, the Securities and Exchange Commission ("SEC") proposed amendments to Rule 506 to Regulation D and Rule 144A under the Securities Act of 1933 that, if adopted, will impact the methods that privately offered funds raise investor capital. The amendments were proposed to implement Section 201(a) of the Jumpstart Our Business Startups Act.
In particular, the proposal would amend Rule 506 to permit the use of general solicitation in connection with an offering of securities, provided that (1) all purchasers of the securities are "accredited investors," as defined in Rule 501(a) of Regulation D, and (2) the issuer takes reasonable steps to verify that purchasers of the securities are accredited investors. The SEC’s proposal declined to set forth specific steps for verification of accredited investor status, stating that determination of the reasonableness of the steps taken by an issuer would be "an objective determination, based on the particular facts and circumstances of each transaction." In arriving at a determination, issuers should consider, among other things, (1) the type of purchaser and accredited investor that the purchaser claims to be; (2) the amount and type of information that the issuer has about the purchaser; and (3) the nature of the offering, meaning (a) the manner in which the purchaser was solicited to participate in the offering, and (b) the terms of the offering, such as a minimum investment amount. Regardless of the particular steps taken, it would be prudent for issuers to keep adequate documentation of the steps taken to verify accredited investor status.
The proposal also directs the SEC to revise Rule 144A, which governs the resale of securities primarily by larger institutional investors known as qualified institutional buyers ("QIBs"). Under the proposed rules, securities sold pursuant to Rule 144A could be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the issuer and any person acting on behalf of the issuer reasonably believe are QIBs.
The SEC is also proposing to revise Form D to add a separate box for issuers to indicate whether they are using general solicitation or general advertising in a Rule 506 offering. The elimination of the restrictions on general solicitation in offerings should have a significant impact on the way that private funds raise capital. The proposed amendments should expand the pool of potential investors and increase the notoriety of private funds.