President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law on April 5, 2012 to facilitate capital raising by reducing regulatory burdens on smaller companies. As mandated by the JOBS Act, the Securities and Exchange Commission (“SEC”) has proposed rules to ease the solicitation and advertising requirements of Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), applicable to certain private securities offerings.
As currently written, Rule 506 exempts certain private securities offerings from the registration requirements of the Securities Act provided that such offerings meet certain standards. These standards include, but are not limited to, the following: (i) the issuer may not use general solicitation or advertising to market the securities, such as newspaper and magazine ads, television and radio broadcasts, and seminars whose attendees were invited using such means; (ii) the issuer may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers; (iii) the issuer must be available to answer questions by prospective purchasers; and (iv) the purchasers of the securities receive “restricted” securities, meaning that the securities may not be sold for at least one year without being registered.
Under the proposed rules, the SEC has added a new subsection (c) to Rule 506 that permits an issuer to use general solicitation and advertising in Regulation D offerings provided that (i) the issuer takes reasonable steps to verify that all purchasers are accredited investors and (ii) all purchasers are accredited investors because they either (a) come within one of the categories of persons who are accredited investors under Rule 501 or (b) the issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.
The SEC’s proposed rules do not specifically establish what will constitute the “reasonable steps” necessary for an issuer to verify that all purchasers are accredited investors. The SEC has, however, indicated that an issuer should consider the facts and circumstances of the transaction in determining the reasonable steps needed to verify that all purchasers are accredited investors. For instance, the SEC has stated that an issuer may consider the following facts and circumstances of the transaction (i) the type of purchaser and the type of accredited investor that the purchaser claims to be; (ii) the amount and type of information that the issuer has about the purchaser; (iii) the manner in which the purchaser was solicited to participate in the offering and (iv) the terms of the offering, such as a minimum investment amount. An issuer has the burden of proving that it is entitled to a Rule 506 exemption and should consider retaining records that document the steps taken by the issuer to verify that all purchasers were accredited investors.
Other than adding subsection (c) to Rule 506 described above, the proposed rules leave the existing provisions of Rule 506 intact. As such, companies relying on the Rule 506 exemption without using general solicitation and general advertising would not be subjection to the requirements of Rule 506(c).
Despite mandates to enact rules relating to general solicitation and advertising by the end of 2012, the SEC has not yet enacted the proposed rules discussed above and such rules will not become effective until the SEC issues implementing rules.