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SEC Proposes Rule Amendments to Evaluate the Rule 506 Market Once General Solicitation is Lifted
Practical Law Legal Update 4-534-0865 (Approx. 5 pages)
SEC Proposes Rule Amendments to Evaluate the Rule 506 Market Once General Solicitation is Lifted
by Practical Law Corporate & Securities
| Published on 10 Jul 2013 • USA (National/Federal) |
The SEC issued a rule proposal designed to provide information on the Rule 506 market once general solicitation is permitted and offer additional investor protection safeguards.
On July 10, 2013, the SEC proposed rule amendments to Regulation D, including Form D, and Rule 156 under the Securities Act. The proposed amendments are designed to provide:
- Information to enable the SEC staff to track the Rule 506 market after the ban on general solicitation is lifted.
- Additional investor protection safeguards that the SEC staff is recommending because of the ban being lifted.
The SEC is accepting comments until September 23, 2013.
Form D
The proposed rule amendments would impact the filing and content of Form D by issuers relying on new Rule 506(c). An issuer intending to conduct a Rule 506(c) offering using general solicitation would have to:
- File a Form D no later than 15 days before first engaging in general solicitation.
- File a closing amendment to Form D within 30 days after the offering has been completed or abandoned.
- Disclose additional information in the Form D, including:
- its website address;
- specific uses of the proceeds of the offering;
- the number and types of accredited investors participating in the offering;
- whether general solicitation materials were filed with FINRA;
- the types of general solicitation used or to be used; and
- methods used or to be used to verify the accredited investor status of purchasers.
Some of the additional information requirements for Form D would apply to any Rule 506 offering, such as information on the number of accredited and non-accredited investors participating in the offering and the amounts purchased by each category of investor.
In addition, under the proposed rule amendments, issuers that 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 private placement. This disqualification would end one year after all required Form D filings were made. The SEC staff would consider waivers of this disqualification on a case by case basis.
General Solicitation Materials
Regulation D would also be amended to add new Rule 509 that would require:
- Legends in written materials used for general solicitation in a Rule 506(c) offering, including that:
- the securities can only be sold to accredited investors;
- the securities are being offered under an exemption from registration and there are no specific disclosure requirements for this type of offering;
- the SEC has not passed on the merits of this offering;
- investing involves risk and investors should be prepared to face the loss of their investment; and
- transfer and resale of the securities are restricted and investors should be aware they may not be able to resell their securities.
- Additional legends and disclosure for private funds that include performance data in their materials, including that:
- the securities are not subject to the protections of the Investment Company Act;
- the performance data is for past performance, and past performance does not guarantee future performance;
- the fund does not have to follow any standard methodology for calculating performance data; and
- the performance data must be as of the most recent practicable date, and the period for the data.
In addition, under proposed new Rule 510T issuers would have to submit their written general solicitation materials to the SEC, on a temporary basis, by no later than the date of first use of the materials. Rule 510T would expire two years after its effective date. These materials would not be made publicly available and would not be considered furnished or filed under the Securities Act or Exchange Act.
Rule 156
Under proposed amendments to Rule 156, the anti-fraud guidance in Rule 156 would also apply to the offer and sale of securities by all private funds, including any private fund engaging in general solicitation in an offering under new Rule 506(c).
Rule 506(c) Work Plan
In addition, the staff of several divisions at the SEC would coordinate to evaluate the use of Rule 506(c) going forward, including:
- The range of purchaser verification methods used.
- Whether capital formation shifts from registered offerings and non-Rule 506(c) offerings to Rule 506(c) offerings.
- Information disclosed in Form D filings and general solicitation materials.