United States: The SEC Proposes New Rules Addressing General Solicitation In Private Offerings

On July 24, 2013, the SEC published proposed amendments to Regulation D and Form D. The SEC is proposing these amendments in connection with the recently adopted amendment to Rule 506 under Regulation D.  The amendment created a new Rule 506(c) exemption from registration, which will become effective on September 23, 2013. The new exemption permits issuers to utilize general advertising and solicitation in offerings conducted under Rule 506(c) as long as all purchasers are accredited investors and the issuer has taken reasonable steps to verify that all such purchasers are accredited investors.  In proposing the new amendments, SEC noted that although new Rule 506(c) will enable issuers to reach a greater pool of potential investors and provide accredited investors increased and more diverse investment opportunities, there are concerns that general solicitation will attract non-accredited investors as well as accredited investors, raising the potential for increased fraudulent activity in the private capital raising market and unlawful sales to non-accredited investors.  The proposed amendments are designed to assist the SEC in monitoring and evaluating sales conduct in the private capital market and to address concerns that may arise from general solicitation activities. The proposed amendments address these issues in a variety of ways.  

Certain proposed amendments focus on Form D, expanding the form's information requirements and making Form D much more detailed by, among other matters, addressing whether the issuer is relying on Rule 506(c), the types of general solicitation used or to be used and the methods used or to be used to verify accredited investor status.  Form D would also include information such as the issuer's website, the names and addresses of the issuer's control persons, as well as related persons, the issuer's size (which may be kept private if the issuer elects), and additional information on the use of proceeds from the offering.

The proposed amendments also require that an initial Form D containing limited information be filed no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering, with an amended Form D required to be filed within 15 calendar days after the first sale in the Rule 506(c) offering. Additionally, the proposed amendment would require that a closing amendment to Form D be filed within 30 calendar days after the closing of any Rule 506 offering.  An issuer that did not comply with the new proposed Form D filing requirements would not be able to rely on Rule 506 for future Rule 506 offerings for one year after required filings are made.      

Rule 156 under the Securities Act of 1933, which provides guidance to investment companies designed to prevent use of misleading or fraudulent sales literature, would be expanded to apply to sales literature used by private funds, including private funds engaged in general solicitation under Rule 506(c).  

In order to address concerns that prospective purchasers may not be adequately informed as to whether they qualify for a Rule 506(c) offering and the potential risks of such offerings, the SEC also proposed a new Rule 509 that will require issuers to include certain legends on general solicitation materials.  Private funds (such as hedge funds, venture capital funds and private equity funds) would be required to include legends disclosing the lack of protections under the Investment Company Act of 1940 and to include additional disclosure if performance data is included in the general solicitation materials.  An issuer that did not comply with new proposed Rule 509 could be enjoined from reliance Rule 506 for future offerings. 

The SEC also  proposed a new Rule 510T that will require issuers, for a two-year period, to submit to the SEC (but not through EDGAR and, therefore, not available to the public) any written general solicitation materials no later than the first day after first used in a Rule 506(c) offering.

The legislation providing for the lifting of the ban on general solicitation in Rule 506 offerings was part of The JOBS Act enacted into law on April 5, 2012, and required that the SEC adopt rules to implement the legislation in July 2012.  The SEC's more than one year delay in adopting the new Rule 506(c) reflects, at least in part, concerns expressed by the SEC, state securities administrators and investor protection groups over lifting the ban on general solicitation and advertising in private offerings.  In order to further enhance investor protection, the SEC also is reviewing, and requesting comment on, whether the definition of "accredited investor" should be modified, particularly for natural persons, to increase income and net worth thresholds, and financial knowledge and experience requirements.  The SEC is requesting comments on all of the proposed amendments as well as a modification to the definition of accredited investor for a period of approximately 60 days. 

If you have any questions, please contact Rebecca Forest, Peter Reinert or any member of the Capital Markets & Technology group.

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.

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Rebecca H. Forest
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