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July 15, 2013
SEC Makes Fundamental Changes to Private Capital-Raising Rules
On July 10, the Securities and Exchange Commission ("SEC" or the "Commission") approved final rules eliminating the decades-old prohibition against general solicitation and general advertising in all Rule 144A offerings and certain Regulation D transactions, as required by Title II of the JOBS Act. The new rules (the "General Solicitation Rules") permit issuers, including start-ups, hedge funds, venture capital funds and private equity funds, to promote their offerings to the general public over the Internet, in traditional print and broadcast media, at public seminars, and through other means. For many issuers, the General Solicitation Rules will significantly impact the way that they raise capital.
In related developments, the SEC approved a final rule prohibiting certain "bad actors" from making private securities offerings (the "Bad Actor Rule"). The SEC also approved proposed rules for public comment that would require issuers availing themselves of the General Solicitation Rules to provide additional information about such offerings to the SEC (the "Regulation D Proposals"). The Regulation D Proposals are designed to aid the Commission in monitoring market practices as they evolve in connection with the General Solicitation Rules.
The General Solicitation Rules are substantially similar to those proposed in August 2012, and these rules, along with the Bad Actor Rule, will be effective 60 days after their publication in the Federal Register. Public comments on the Regulation D Proposals may be submitted?within 60 days after their publication in the Federal Register. The SEC's fact sheet with respect to Rule 506(c), as well as the release accompanying its adoption (the "Adopting Release"), is available on the SEC's website at http://www.sec.gov/news/press/2013/2013-124.htm.
New Rule 506(c)
The General Solicitation Rules eliminate the prohibition against general solicitation with respect to offers and sales of securities conducted in reliance on new Rule 506(c) of Regulation D. Offerings made pursuant to Rule 506(c) must comply with the following conditions:
- All purchasers of the securities must be "accredited investors,"[1] or the issuer must reasonably believe that all purchasers are accredited investors at the time of the sale of securities; and
- The issuer must take reasonable steps to verify that all purchasers of the offered securities are accredited investors.
- Verifying accredited investor status on the basis of income through the review of IRS forms along with a written representation from the individual.
- Verifying accredited investor status on the basis of net worth through the review of certain bank, brokerage and other documents along with a written representation from the individual.
- Obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor.
- Obtaining a certification from the purchaser at the time of sale, for any natural person who invested in an issuer's 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and remains an investor.
- Amending Form D to require disclosure of additional information about Rule 506(c) offerings, and requiring issuers to file a Form D in Rule 506(c) offerings both prior to engaging in general solicitation and after the offering is completed.
- Disqualifying issuers who fail to comply with Form D filing requirements from making an offering pursuant to Regulation D for one year, subject to a cure period.
- Requiring issuers to include certain legends and disclosures in all written general solicitation materials, and to file general solicitation materials with the SEC for a period of two years after a final rule incorporating the Regulation D Proposals becomes effective.