SEC Votes To Lift Ban On General Solicitation For Private Offerings

The Securities and Exchange Commission recently voted to abolish the prohibition on general solicitation and general advertising for private offerings and sales solely to “accredited investors” conducted pursuant to new Rule 506(c) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and as directed by the Jumpstart Our Business Startups Act (the “JOBS Act”). The SEC also approved rules designed to disqualify “felons and other ‘bad actors’” from participating in certain securities offerings as directed by the Dodd-Frank Act.
The final rule amendments are scheduled to become effective 60 days after publication in the Federal Register and following a 60-day public comment period.
Rule 506(c)
The new provision will permit issuers to use general solicitation and general advertising to offer their securities provided that they take reasonable steps to verify that all such purchasers are accredited investors or the issuer “reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.”
An issuer is required to make an objective assessment of each purchaser based on existing facts and circumstances and the transaction. The SEC provided a non-exclusive list of means by which issuers may satisfy the verification requirement for individual investors, including:
• Reviewing copies of any IRS tax forms that report the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year.
• Reviewing documents evidencing assets, dated within the prior three months, including bank statements, brokerage statements, and other statements of securities holdings; certificates of deposit; tax assessments; and appraisal reports by independent third parties.
• Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status.
Additionally, if a potential investor has invested previously with an issuer and was required to be an accredited investor in such offering, such potential investor will be deemed to be an accredited investor for any Rule 506(c) offering for the same issuer so long as such person provides a certification that he or she is an accredited investor at the time of the subsequent sale.
The existing Rule 506 exemption for private placements that allows for sales to up to 35 non-accredited investors and an unlimited number of accredited investors with whom there is a pre-existing and substantial relationship will continue to be in effect. Issuers relying on that exemption are not subject to the new verification provisions, but may not utilize general solicitation and advertising methodologies either.
Conclusion
Issuers and placement agents are reminded that the new rules adopted today will not be effective until 60 days after publication in the Federal Register. While issuers relying on the general solicitation and advertising mechanism will be capable of more widely seeking potential investors, they will need to carefully consider the requirement to verify that all such purchasers are accredited investors.