• SEC Final Rules on General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
  • October 2, 2013
  • Law Firm: Withers Bergman LLP/Withers LLP - New Haven Office
  • On 23 September 2013 the US Securities Exchange Commission (‘SEC’)’s amended Rule 506 of Regulation D and Rule 144A under the US Securities Act 1933 to permit general solicitation and general advertising in transactions, became effective.

    The Jumpstart Our Business Startups Act 2012 required the SEC to amend its Rule 506 to permit general solicitation and general advertising in certain securities offerings, so long as all purchasers of the securities are accredited investors with any issuer relying on Rule 506 required to take reasonable steps to verify that the purchasers of the securities were accredited investors.

    The SEC provided the following factors for an issuer to consider when determining the reasonableness of the steps the issuer takes to verify that a purchaser is an accredited investor:

    • the nature of the purchaser and the type of accredited investor the purchaser claims to be;
    • the amount and type of information that the issuer has about the purchaser; and
    • the nature of the offering.

    The SEC further stated that these factors are interconnected and the information gained by examining all of these factors would assist an issuer in assessing the reasonable likelihood that a purchaser is an accredited investor. The SEC noted in its adopting release that “if an issuer has actual knowledge that the purchaser is an accredited investor, then the issuer will not have to take any steps at all.” However, it is still important for issuers to retain adequate records that document the steps taken to verify that a purchaser is an accredited investor.

    Acknowledging concerns that verification of natural persons’ accredited investor status poses greater difficulties for issuers compared to other types of investors, the SEC also included four specific non-exclusive, non-mandatory methods of verifying accredited investor status for natural persons. If such methods are used, they are deemed to satisfy the verification requirements. These methods include:

    • verification based on net income (i.e. reviewing copies of any IRS form that reports the potential investor’s income for the two most recent years and obtaining a written representation from such potential investor that he or she reasonably expects to reach the required income level to qualify as an accredited investor in the current year);
    • verification based on net worth (i.e. reviewing bank statements, brokerage statements, certificates of deposit, tax assessments and/or credit reports from a national consumer reporting agency and obtaining a written representation that the potential investor has disclosed all liabilities necessary to make a determination of net worth);
    • third party verification (i.e. obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant that they have taken reasonable steps within the past three months to verify the potential investor’s accredited investor status and that such potential investor is an accredited investor); and
    • verification by means of existing relationship (i.e. obtaining a certification from the potential investor if such potential investor invested in an issuer’s Rule 506(b) offering as an accredited investor before 23 September 2013 and remains an investor in the issuer).

    SEC Rule 144A was amended to permit securities to be offered to persons other than qualified institutional buyers (QIBs), provided that such securities are sold only to persons that the seller (and any person acting on behalf of the seller) reasonably believe are QIBs.

    Thus, an underwriter or placement agent in a Rule 144A transaction may offer to sell securities utilizing general solicitation or general advertising as long as such securities are ultimately sold only to QIBs.

    In addition, the SEC has proposed, but has not yet adopted, the following amendments to offer additional investor protection safeguards and information in connection with general solicitation and general advertising:

    • Issuers relying on Rule 506(c) would be required to:
      • file a Form D no later than 15 days before first engaging in general solicitation and/or general advertising;
      • file a closing amendment to Form D within 30 days after the offering has been completed or abandoned;
      • disclose additional information, including, but not limited to, the types of general solicitation and/or general advertising to be used and the methods to be used to verify the accredited investor status of purchasers.
    • Additionally, under the proposed amendments, an issuer that has failed to file any required Form D reports in the past five years would be disqualified from using any provision of Rule 506 for a future offering. The disqualification would run for one year from the date all required Form D filings were made.
    • Proposed Rule 509 would require prescribed legends in any written materials used for general solicitation and/or general advertising in a Rule 506(c) offering. Furthermore, a proposed Rule 510T would require issuers to submit any general solicitation and/or general advertising materials to the SEC no later than the date of first use of the materials. These submitted general solicitation and/or general advertising materials would not be available to the public and would expire two years after their effective date.
    • Under the proposed amendments, Rule 156 would also apply to the sales literature of all private funds. Currently, Rule 156 provides guidance on the types of information that could be misleading in sales literature used by registered investment companies.