SEC Approves Final JOBS Act General Solicitation Rules | Practical Law

SEC Approves Final JOBS Act General Solicitation Rules | Practical Law

The SEC approved final rules to permit general solicitation and general advertising in certain securities offerings.

SEC Approves Final JOBS Act General Solicitation Rules

Practical Law Legal Update 6-534-0925 (Approx. 5 pages)

SEC Approves Final JOBS Act General Solicitation Rules

by Practical Law Corporate & Securities
Published on 10 Jul 2013 • USA (National/Federal)
The SEC approved final rules to permit general solicitation and general advertising in certain securities offerings.
On July 10, 2013, the SEC approved final rules to permit general solicitation and general advertising in certain securities offerings under Rule 506 of Regulation D and Rule 144A of the Securities Act, as required by the JOBS Act.
The rules become effective on September 23, 2013.

Rule 506

Under new Rule 506(c), an issuer can use general solicitation and general advertising to offer and sell securities in a Rule 506(c) offering if:
  • All of the terms and conditions in Rule 501 and Rule 502(a) and 502(d) are satisfied.
  • All of the purchasers of the securities are accredited investors.
  • The issuer takes reasonable steps to verify that the purchasers are accredited investors.
The final rule release reaffirmed that whether steps taken to verify accredited investor status are reasonable is an objective, principles-based determination by the issuer. This determination should be based on the particular facts and circumstances of each purchaser and the transaction. In making this determination, the issuer should consider the following factors:
  • Type of purchaser and the type of accredited investor that the purchaser claims to be.
  • Amount and type of information that the issuer has about the purchaser.
  • Nature of the offering, including the manner of the solicitation and the terms of the offering.
However, to provide additional clarity while preserving flexibility for issuers, new Rule 506(c) specifies that an issuer will be considered to have taken reasonable steps to verify that a natural person is an accredited investor if it does any of the following:
  • If basing the decision on net income:
    • reviews any IRS forms that report a person’s income for the past two years; and
    • obtains a written representation that the person reasonably expects to reach the income level required to qualify as an accredited investor in the current year.
  • If basing the decision on net worth:
    • reviews one or more types of documents dated within the past three months, including bank statements, brokerage statements, tax assessments and a report from one of the national consumer reporting agencies; and
    • obtains a written representation that the person has disclosed all liabilities necessary to make a net worth determination.
  • Obtains a written representation from certain third parties, including registered broker-dealers or investment advisors, that they have taken reasonable steps to verify the person's accredited investor status within the past three months and have determined that the person is an accredited investor.
  • Permits existing securityholders who had acquired issuer securities in a previous Rule 506 offering and had qualified as accredited investors at that time to participate in the Rule 506(c) offering as long as each participating securityholder certifies his or her accredited investor status at the time of the sale.
These steps, itemized in Rule 506(c)(2)(ii), are neither exclusive nor mandatory. The final rules release discussed other considerations, factors and weights that an issuer can evaluate in taking additional steps to verify purchasers' status.
The existing provisions of Rule 506 continue as a separate exemption so that issuers conducting Rule 506 offerings without the use of general solicitation and general advertising are exempt from the new verification rule, and can continue to conduct their offerings in the same manner as past Rule 506 offering practice.
The final rule release also reaffirmed that the reasonable belief standard for accredited investor status in Rule 501(a) remains unchanged by the JOBS Act.
Amended Rule 500(c) clarifies that changes to Rule 506 do not amend the Section 4(a)(2) exemption. An issuer relying on Section 4(a)(2) for an exemption from registration cannot use general solicitation or general advertising.
Because of these new rules, the SEC is also proposing changes to other provisions of Regulation D that would provide additional investor safeguards and allow it to collect more information to monitor the Rule 506 market. For more details, see Legal Update, SEC Proposes Rule Amendments to Evaluate the Rule 506 Market Once General Solicitation is Lifted.

Form D

Form D is revised to add a separate box in Item 6 for issuers to check to indicate whether they are claiming an exemption under Rule 506(c).
Other changes to Form D relating to both existing Rule 506 offerings and future Rule 506(c) offerings are being proposed. For more details, see Legal Update, SEC Proposes Rule Amendments to Evaluate the Rule 506 Market Once General Solicitation is Lifted: Form D.

Rule 144A

Rule 144A is revised to permit securities to be offered under Rule 144A to persons other than qualified institutional buyers (QIBs), including by use of general solicitation or general advertising, if those securities are actually sold only to investors which the seller and any person acting on behalf of the seller reasonably believe is a QIB. Regulation M is also amended to reflect and conform to the changes to Rule 144A.

Regulation S

The final rules release reaffirms that global securities offerings with a Rule 144A or Rule 506 component in the US and a concurrent offshore offering conducted in compliance with Regulation S will not be integrated.
For more information on other provisions of the JOBS Act, see Practice Note, Road Map to the Jumpstart Our Business Startups (JOBS) Act of 2012.