The Securities and Exchange Commission today published final rules eliminating the prohibition
against general solicitation and general advertising in certain
securities offerings, as mandated by Section 201(a) of the JOBS
Act. The final rules permit issuers to use general solicitation and
general advertising to offer securities under Rule 506 of
Regulation D, provided that the issuer takes "reasonable steps
to verify" that the purchasers are accredited investors. In
adopting new Rule 506(c), the SEC reaffirmed that private funds
will be permitted to engage in general solicitation in compliance
with the new Rule without losing the exclusion from the definition
of "investment company" under either Section 3(c)(1) or
Section 3(c)(7) of the Investment Company Act of 1940. The rules
also provide that securities may be offered under Rule 144A by
means of general solicitation or general advertising as long as the
securities are sold only to qualified institutional buyers (QIBs)
or persons the seller reasonably believes are QIBs. The new rules
will go into effect 60 days after publication in the Federal
Register.
The SEC also published for comment proposed rule amendments that would impose
additional obligations on offerings conducted pursuant to
Regulation D. These proposed amendments are designed to allow the
SEC to evaluate changes in the private placement market and address
any concerns that may arise in connection with lifting the ban on
general solicitation. The proposed rules contemplate, among other
things, that issuers would be required (i) to notify the SEC both
before general solicitation begins in reliance on new Rule 506(c)
and after the closing of a Regulation D private placement, (ii) to
submit to the SEC written general solicitation materials containing
appropriate legends to the SEC and (iii) to refrain from relying on
Rule 506 for one year if the issuer, or any predecessor or
affiliate of the issuer, did not comply, within the last five
years, with Form D filing requirements in a Rule 506
offering. In addition, the proposed amendments to Rule 156
would extend the antifraud guidance contained in the rule to the
sales literature of private funds.
Removing the prohibition against general solicitations in Rule 506
and Rule 144A offerings will permit issuers to use a number of
previously unavailable solicitation and advertising methods when
seeking potential investors, which should be welcome news to all
those seeking capital. However, because the Congressional mandate
only applies to Rule 506 and not more broadly to Section 4(a)(2)
offerings, the SEC retains broad authority to impose additional
obligations in order to obtain the benefit of the safe harbor.
Today's publication of the proposing release amending
Regulation D begins that process. Nevertheless, we believe lifting
the ban on general solicitation will have a significant impact on
private fundraising efforts.
This alert does not address private funds. Ropes
& Gray will shortly release a separate alert addressing in
greater detail the implications of these new and proposed rules on
private funds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.