United States: Costs And Benefits Of JOBS Act's Lifting Of General Advertising Ban

Last Updated: December 19 2013
Article by Gregory J. Nowak and Edward T. Dartley

Reprinted with permission from the December 16, 2013 edition of the New York Law Journal © 2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com - 877.257.3382 - reprints@alm.com.

On July 10, 2013, the Securities and Exchange Commission (SEC) swept away the 80-year-old prohibition against general solicitations and advertising for private placements of securities pursuant to Regulation D of the Securities Act of 1933, finally implementing the Congressional directive to do so under the JOBS Act of 2012.

The SEC adopted new Rule 506(c) and related regulations,1 effective on Sept. 23, 2013. Rule 506(c) allows issuers to advertise freely, to solicit, and to discuss their private placements through a broad range of avenues, from Internet and print media, to speaking engagements at conferences, to presentations made to small groups of potential investors, so long as the issuer only sells its securities to "accredited investors." At the same time, the SEC took the opportunity to propose changes to Form D filing requirements, and to propose extending Rule 156 registered investment company disclosure requirements to private investment funds.2

The lifting of the solicitation prohibition has engendered tremendous discussion in the legal and business community, as private companies and funds weigh the potential benefits and costs of these new opportunities. In a recent congressional hearing, Director of Corporation Finance Keith Higgins said that as of Oct. 30, 2013, over 200 Form D filings had been made which indicated that advertising pursuant to Rule 506(c) was planned.3 At the same time, there has yet to be any noticeable amount of advertising and solicitation by private companies, hedge funds, and the like. This article examines some of the benefits that Rule 506(c) can bring to private placement issuers, along with new requirements that also become effective.

New Rule 506(c)

Private placements under Rule 506 have long been an important and popular capital-raising mechanism with private companies, hedge funds, and private equity funds. Rule 506 allows issuers to raise funds without complying with numerous time-consuming and expensive requirements that would be mandated under other public securities offering provisions of the Securities Act. However, the relative ease with which issuers historically could raise capital under Rule 506 came with its own set of restrictions, including a prohibition on general advertising and solicitation. This restriction was interpreted broadly, and resulted in issuers taking great pains to avoid speaking about anticipated or pending private placement offerings in even informal settings. Information about private placements required confidential treatment, and solicitations needed to be primarily limited to accredited investors with whom the issuer had preexisting relationships.

New Rule 506(c) frees up issuers to solicit generally in a wide variety of mediums and forums. While the lifting of the restriction allows a private placement issuer to take advantage of traditional advertising media such as the Internet, the issuer's website, and print media, to name just a few, there is a significant and more subtle advantage in being able to "just talk" about one's offering. For instance, a hedge fund manager who offers a fund under Rule 506(c) can discuss the fund offering in a business news interview, or as a speaker (or attendee) at an industry conference. Likewise, a private equity manager that focuses on the health care sector can explore cross-marketing opportunities with an investment manager that specializes in the natural resources sector. While there has not yet been a rush to use Rule 506(c) to engage in express advertising, there is growing interest in exploring the potential for Rule 506(c) to free up private placement issuers to engage in these more informal types of marketing and solicitation.

As much as Rule 506(c) opens the door to new avenues for raising capital, the SEC included a significant gatekeeping requirement in the regulatory scheme. Under both old Rule 506—which is now Rule 506(b)—and new Rule 506(c), an issuer may sell securities only to persons who are "accredited investors" under the Securities Act of 1933. In order to meet this standard, an investor who is a natural person must have either (i) a net worth of at least $1 million, not including the value of one's primary residence, or (ii) income of at least $200,000 in each year of the last two years (or $300,000 together with his or her spouse if married) and have the expectation to make the same amount in the current year.4


Under former Rule 506 and current Rule 506(b), an issuer may rely solely on the investor's certification as to his or her status as an accredited investor. Rule 506(c), however, imposes an affirmative obligation for the issuer to take "reasonable steps" to verify that participants in private placements are accredited investors. In the adopting release, the SEC identified several nonexclusive methods for meeting the verification requirement. The simplest of these allows an issuer to continue to rely on "self-certification" by the prospective investor, if the individual is a current investor in a prior Rule 506 private placement offering by the issuer (invested before Sept. 23, 2013. Of course, this method is of limited value, as it cannot be used for new investors that the issuer would like to attract.

Two other nonexclusive methods for verification identified by the SEC are for an issuer to take "reasonable steps" to verify that an investor meets either the income and/or net worth thresholds of the accredited investor definition. These methods, however, raise challenges for issuers, as they will typically require the collection and evaluation of actual documents containing sensitive and confidential financial information from the investor, such as tax returns, credit reports, and bank and brokerage statements, as well as assessments of liabilities. Understandably, issuers may be reluctant to take on the administrative burdens of accepting custody of financially sensitive documents, given the host of issues that it raises, such as (i) who at the firm will have access to this financially sensitive information; (ii) who will be responsible for the care and custody of the documents containing the information; (iii) who will be responsible for evaluating the information and deciding whether or not the investor qualifies as an accredited investor; (iv) what procedures need to be implemented to reduce the risk of errors in this evaluation process; (v) how long will the firm need to retain investors' financial information; and (vi) what privacy considerations are raised by the acceptance of such information. Just as understandably, many investors may well be reluctant to provide personal financial information such as tax returns and credit reports to private companies, private equity firms, or hedge funds, especially where there is no prior relationship with the firm.

Perhaps in recognition of these potential obstacles, the SEC in its adopting release identified third-party verification of accredited investor status as an additional nonexclusive method available to issuers under Rule 506(c). The SEC identified four categories of professionals that can perform this function: attorneys, accountants, broker-dealers, and SEC-registered investment advisers. Third-party verification has some significant advantages: (i) it takes the administrative burden of verification off the issuer; (ii) it takes the risk of getting it wrong off the issuer; and (iii) it provides a neutral and confidential intermediary that may be more palatable to potential investors who are interested in investing but who otherwise may balk at the thought of providing documents containing their private financial information to investment managers or companies with whom they have never dealt. As of this writing, third-party verification services are just beginning to emerge.

Other Proposed Rule Changes

While the lifting of the ban on general solicitation of private placements creates significant opportunities for private issuers, the SEC has also proposed a series of rule changes that would impose new disclosure and filing requirements on issuers seeking to utilize Rule 506(c), as well as significant consequences in certain circumstances for failure to follow the proposed rules. These proposals have engendered significant criticism, and many industry participants have submitted comment letters (including Pepper Hamilton5) to the SEC urging the Commission to modify or eliminate many of these proposed rules.

One of the SEC's most significant rule changes is an effort to give teeth to the Form D filing requirements by imposing a one-year time-out from using Rule 506 if such filings are not timely made. Currently, issuers proceeding under Rule 506 must file a Form D with the SEC, disclosing certain categories of information about the issuer, the offering, and the potential investors. Under current Rule 507, a firm may be disqualified from using Regulation D if it fails to comply with Form D filing requirements, but only if a court has first entered an injunction for violating the filing requirements.

The SEC's proposed rule changes would impose a significant penalty for filing failures or missteps. The proposed rules provide that a failure to comply with Form D filing requirements at any time within a five-year period will result in an automatic one-year disqualification from using Rule 506. While issuers will be excused for a first-time violation, a subsequent failure to comply with Form D filing requirements will trigger the one-year prohibition, starting from the date when all required Form D filings were made.

The severe consequences of the SEC's proposed change to the Form D requirements may be driven in part by the fact that, historically, some issuers failed to follow Form D filing requirements without any real consequences. In a recent speech, Director of Investment Management Norm Champ noted that the proposed changes to Form D filing requirements would serve as a more effective mechanism for enforcing issuers' compliance with these requirements.6

The SEC's proposed rule changes also require up to three Form D filings: an "Advance Form D" at least 15 calendar days ahead of the commencement of a Rule 506(c) offering, a second Form D filing within 15 calendar days of the first sale of securities, and a "Closing Form D" filing at the conclusion of the offering. The proposed Advance Form D filing in particular has been a subject of intense criticism, including from members of Congress. In a strongly worded letter dated July 22, 2013, Congressmen Patrick T. McHenry (R-N.C.) and Scott Garrett (R-N.J.) of the House Financial Services Committee argued that the 15-day waiting period reintroduces a ban on general solicitation that the JOBS Act has lifted.7 While SEC Chair Mary Jo White was somewhat dismissive of the congressmen's letter, the fact remains that the SEC's proposal for up to three separate Form D filings, if enacted as proposed, will triple the filing responsibilities for private placement issuers, and accordingly triple the risks of triggering the one-year disqualification rule if a filing requirement is missed.

The SEC's proposed rule changes also seek increased disclosure and transparency from private placement issuers. If adopted, the rule changes would require all private placement issuers to include in their Form D filings a substantial amount of information that is not required under the current rule, such as the number and types of accredited investors that were purchasers, and information about investment advisers that directly or indirectly act as promoters of a pooled investment fund issuer. For issuers seeking to engage in Rule 506(c) offerings, those issuers will be required to disclose the types of general solicitations to be used and the verification methods for confirming the accredited investor status of purchasers.

Another proposed rule aimed at greater transparency and information flow to the SEC is proposed Rule 510T. This is a temporary rule that would require issuers engaging in Rule 506(c) offerings to submit to the SEC any marketing materials used in a general solicitation, no later than the date of first use. Submissions would not be available to the public, and the requirement would expire after two years. The SEC's stated purpose in proposing these new disclosure requirements is to gather information on Rule 506 and the impact of new Rule 506(c). However, this rule if adopted will give the SEC access to a wealth of substantive information about Rule 506(c) offerings, and a tremendous amount of marketing materials in a variety of forms. For private placement issuers seeking to take advantage of the opportunity to solicit and advertise, the corollary is that the SEC has a greater opportunity to spot deficiencies and make determinations about whether to initiate examinations of particular private equity funds or hedge funds.

The SEC's proposal to require issuers to submit marketing materials takes on added significance when one takes into account that the Commission is also proposing to apply the standards of Rule 156 of the Securities Act of 1933 to private funds that engage in Rule 506(c) offerings. Rule 156 presently provides guidance on the manner in which registered investment company (i.e., mutual funds) sales literature may be deemed to be misleading under the federal anti-fraud securities laws. Rule 156 contains numerous examples of how performance representations and statements about the attributes of registered funds can be misleading. Because the guidance was aimed at issues specific to registered investment companies, managers of private equity funds and hedge funds will need to closely scrutinize whether and how marketing materials used in conjunction with a Rule 506(c) offering can comply with guidance that did not have those industries in mind. In addition, private fund managers will need to be cognizant of the fact that these marketing materials will then be submitted to the SEC under proposed Rule 510T.8


The JOBS Act's removal of the prohibition on solicitation and advertising opens up substantial opportunities for private placement issuers that want to expand their audience of potential capital sources. Over time, as issuers feel their way through challenges such as the accredited investor verification standard and the SEC's additional proposed rule changes (if adopted), they will get comfortable with taking advantage of these opportunities, either through traditional advertising or through just being able to "get the word out" about private placement offerings in a variety of informal settings.


1. Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Securities Act Release No. 33-9415 (July 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9415.pdf.

2. Amendments to Regulation D, Form D and Rule 156 under the Securities Act, Securities Act Release No. 33-9416 (July 10, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9416.pdf.

3. http://www.reuters.com/article/2013/10/30/us-senate-sec-jobs-idUSBRE99T17G20131030.

4. Rule 501 of Regulation D, under the Securities Act of 1933.

5. See http://www.sec.gov/comments/s7-06-13/s70613-369.pdf.

6. Current SEC Priorities Regarding Hedge Fund Managers, Sept. 12, 2013 Speech by Norm Champ, available at http://www.sec.gov/News/Speech/Detail/Speech/1370539802997#.UoUZbRD85JQ.

7. Letter dated July 22, 2013, available at http://mchenry.house.gov/uploadedfiles/mchenry_garrett_to_sec_chair_white_07.22.2013.pdf.

8. At the same time that the SEC amended Rule 506, the Commission also adopted new Rule 506(d), which disqualifies securities offerings from relying on Rule 506 in cases where certain felons and other "bad actors" are involved. Rule 506(d) is triggered for certain specific categories of criminal convictions and court orders for serious offenses, and should impact relatively few private placement issuers. Accordingly, detailed treatment of this Rule is beyond the scope of this article.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Gregory J. Nowak
Edward T. Dartley
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions