This morning the Securities and Exchange Commission (“SEC”) voted 4 to 1 to lift an 80-year-old ban on advertisements of private offerings. The Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) required the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in private placements as long as all purchasers are accredited investors. The new rule will take effect 60 days after the SEC publishes it in the Federal Register. However, companies will still have to verify that securities are sold only to accredited investors.
Issuers and EB-5 projects seeking to raise capital through the sale of securities generally must either register the securities offering with the SEC or rely on an exemption from registration. Most of the exemptions from registration prohibit companies from engaging in general solicitation. The exemption from registration contained in Rule 506 of Regulation D is often used by EB-5 projects.
In an offering of securities that qualifies for the Rule 506 exemption, an EB-5 project may raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors. For the past 80 years, issuers seeking to raise capital under Rule 506 could not advertise to the general public. With today’s rule change, issuers under Rule 506 will be able to freely advertise to any potential investors.
However, issuers still need to take reasonable steps to verify that investors are accredited. Additionally, the SEC has also voted to issue new rules containing stronger investor protections. These include requiring issuers who take advantage of the new advertisement rules to provide additional information about their securities offerings, provide more information about their investors, and, in addition to other current requirements, be required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering and within 30 days of completing an offering, issuers would be required to update the information contained in the Form D and indicate that the offering has ended. The SEC also adopted rules that would disqualify felons and other bad actors from participating in Rule 506 offerings.
This will fundamentally alter the marketing landscape for EB-5 projects by allowing project companies to solicit investors through social media, press releases, newspapers, billboards and other traditional marketing campaigns. While it remains to be seen whether this will make it easier for EB-5 projects to raise money, the new rule changes will certainly allow EB-5 projects to reach more potential investors.