JOBS Act SEC Proposed Rules: Solicitation & Advertising for Private Offerings

by Karl J. Ege, Mel Wheaton, Danielle Benderly, and James T. Carroll

Excerpt:

The SEC recently issued long-awaited proposed rules to remove existing general solicitation and advertising prohibitions for private offerings and sales of securities under Rule 506 and Rule 144A under the Securities Act of 1933, as amended. These proposed rules implement Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act) enacted earlier this year. The SEC's proposed amendments leave intact the existing ability of a company to conduct a Rule 506 offering (under Rule 506(b)) without engaging in general solicitation or advertising.

This Update provides a summary of key aspects of the proposed rules and offers practical advice.

New Proposed Rule 506(c) Will Allow General Solicitation and Advertising

The proposed rules add a new subsection (c) to existing Rule 506, which would permit general solicitation and advertising for private offerings of securities under Rule 506 as long as:

-the company takes reasonable steps to verify that the purchasers of the securities are accredited investors; and

-all purchasers of securities are, in fact, accredited investors, or the company reasonably believes that such purchasers are accredited investors at the time of sale.

The SEC will be soliciting comments regarding the proposed rules during a comment period that will extend for a period of 30 days following publication of the proposed rules in the Federal Register.

Reasonable Steps to Verify Accredited Investor Status. The SEC declined to impose specific methods that a company must undertake under Rule 506(c) to verify accredited investor status. Further, the SEC declined to provide even a non-exclusive list of specific methods that would satisfy the "reasonable steps" requirement based on its stated belief that imposing specific methods for determining accredited investor status would be impractical and potentially ineffective in light of the wide range of verification issues that may arise in connection with a particular offering. The SEC chose instead to pursue a more flexible and adaptable (albeit less certain) facts-and-circumstances approach to determine whether, in a particular case, reasonable steps have been taken by the company to verify accredited investor status. Companies face significant consequences for failing to meet this burden of proof, since a company that relies on the new Rule 506(c) exemption and fails to meet the "reasonable steps" standard cannot rely on the statutory exemption provided by Section 4(a)(2) of the Securities Act, which would leave the company without any exemption from the registration requirement.

Reasonable Belief as to Accredited Investor Status. The proposed rules will continue to employ the same reasonable belief standard currently applied to Rule 506 offerings, meaning that as long as a company takes reasonable steps to verify that a purchaser is an accredited investor and reasonably believes that the purchaser is accredited at the time of sale, the fact that a purchaser ultimately turns out not to have been accredited at the time of sale will not cause the company to lose its ability to rely upon Rule 506(c).

Amended Form D. The proposed rules would include modest changes to Form D. Among the changes are that a new box titled "Rule 506(c)" would be added for companies relying on the new exemption and that the existing box currently titled "Rule 506" would be renamed "Rule 506(b)."

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Karl J. Ege, is Senior Counsel at Perkins Coie. He returned to private practice after serving for more than 15 years as Chief Legal Officer for Russell Investments. While in that role he had global responsibility for Russell's legal, compliance, internal audit and risk management functions and was instrumental in developing Russell's international business. Although retired from Russell, he remains a director of the Russell 20-20 Association. At Perkins Coie Karl advises senior executives and boards on matters involving corporate governance, internal controls and corporate investigations. Karl is also involved in advising the firm's investment and financial services clients and emerging companies, as well as assisting on the firm's efforts in Asia, Europe and Latin America.

Mel Wheaton is of counsel with the firm's Business practice. He represents emerging companies, venture capital and private equity funds and investors, family offices and other privately-held companies in matters related to financing activities, corporate governance, strategic transactions, investment management and risk management. He has participated in various debt and equity financings and drafted and negotiated complex tax, economic and governance provisions on behalf of clients in diverse industries, including venture capital, real estate and professional sports. He has extensive experience working with limited liability companies, partnerships and family offices, having served as in-house counsel for a Seattle-based family office where he oversaw legal matters and operations.

Danielle Benderly is a partner at Perkins Coie, and specializes in assisting public companies with their corporate governance and securities regulation, reporting and compliance needs, including insider trading issues under Section 16, Rule 144 and Rule 10b-5. Danielle's practice also focuses on advising public and emerging growth companies, as well as individual executives, with respect to stock-based executive compensation design and interpretation issues, including for securities offerings, M&A transactions and ongoing securities compliance and disclosure obligations. Danielle is a frequent author and speaker on these issues.

James T. Carroll is an associate in the Perkins Coie's Emerging Companies practice and focuses his practice on the representation of start-up and high-growth technology companies in matters of corporate finance and securities, venture capital, mergers and acquisitions, and corporate governance.