Rule 506 (17 C.F.R. § 230.506) of Regulation D has long
been available for use by issuers looking to raise potentially unlimited
amounts of capital through securities offerings without having to register the
offering under the federal Securities Act of 1933 provided that the investment
group in any such offering is limited to “accredited” investors and no more
than 35 non-accredited investors who meet certain sophistication and experience
standards. One of the limitations that had
been imposed on the use of Rule 506 had been that issuers could not engage in “general
solicitation” or “general advertising” when looking for investors. However, on July 10, 2013, the Securities and
Exchange Commission (“SEC”) announced that it had adopted, pursuant to the
celebrated Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”),
amendments to Rule 506 that included a new Rule 506(c) that provides that the
prohibition against general solicitation and advertising will no longer apply
to offerings of securities made pursuant to Rule 506(c) provided that all purchasers
of securities sold in any offering under Rule 506(c) are accredited investors
and certain other conditions are satisfied including the requirement that the
issuer take reasonable steps to verify that purchasers of securities sold in
such offering are accredited investors.
See SEC Release No. 33-9415; No. 34-69959; No. IA-3624;
File No. S7-07-12.
noted that the easing of the general solicitation and general advertising
prohibitions for Rule 506 may well be the most important change in the JOBS
Act, at least over the near-term. Rule 506 already has no cap on the amount of
capital that can be raised and is available to both public and private
companies without the need to comply with specific disclosure requirements for
offers and sales solely to accredited investors (although issuers must still
comply with the anti-fraud rules included in the federal securities laws).
Accordingly, it is not surprising that Rule 506 is already a popular method for
raising capital; however, one of the problems had been that the prohibitions on
general solicitation often made issuers reluctant to try and reach out beyond
accredited investors that already had a pre-existing relationship with them to
generate interest in a Rule 506 offering. It is anticipated that the changes in the JOBS
Act will increase the pool of capital available through Rule 506 by allowing
issuers to expand their search efforts, using both traditional and social media
outlets, without fear that they might run afoul of solicitation and advertising
limitations. For example, issuers may
now discuss their business activities at investment conferences without
worrying about whether or not they are violating the general solicitation
ban. However, it is expected that
certain issuers may still be reluctant to engage in explicit advertising
activities due to concerns that they may appear to be desperate and the additional
recordkeeping and verification requirements.
Significantly the SEC
did not choose to specifically regulate the form and content of advertising
that issuers may use under Rule 506(c), although general anti-fraud
prohibitions would certainly apply.
Issuers planning to advertise unregistered securities must notify the
SEC by checking a box on Form D; however, the primary purpose of this requirement
is to assist the SEC in checking to make sure that such issuers are taking the
additional steps necessary to ensure that actual purchasers do indeed satisfy
the standards for accredited investor status.
discussion of Regulation D and an extensive set of checklists, client
communications and forms for use in securities offerings see my Westlaw Next publication Business Transactions Solutions, Securities Law
Compliance (§§ 98:1 et seq.).
Changes have been made to several forms to take into account the
amendments to Rule 506 described above.
For example, the Securities Law Compliance Questionnaire (see Master
Form at § 98:123), which attorneys can use to assess the
existing compliance activities of their clients in the securities law area,
highlights the need to collect and review documentary information from
investors to verify “accredited investor” status and similar changes have been
made in the form of Investor Questionnaire that should be completed and signed
by investors (see Specialty Form at § 98:149).
The template for a client letter relating to a proposed limited
Specialty Form at § 98:155) has been updated to include more information
regarding the amendments to Regulation D and new Rule 506(c).