SEC Issues Proposed Rules to Permit General Solicitation and General Advertising in Certain Private Offerings

SEC Issues Proposed Rules to Permit General Solicitation and General Advertising in Certain Private Offerings

by David Mishel, Nicholas S. Hodge, Kay A. Gordon, Yusef Alexandrine, and Remsen M. Kinne IV

On April 5, 2012, the Jumpstart Our Business Startups Act ("JOBS Act") became effective. The JOBS Act mandated, among other things, that the Securities and Exchange Commission ("SEC") amend Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933, as amended ("Securities Act") to permit general solicitation and general advertising (collectively "general solicitation") in connection with certain "private" offerings of securities.  The JOBS Act also mandated that the amendments to Rule 506 require issuers to take reasonable steps to verify that purchasers of the securities are accredited investors, using methods determined by the SEC. The SEC proposed such amendments on August 29, 2012 ("Proposing Release").

Specifically, if adopted, the proposed amendments would:

  • permit general solicitation in securities offerings under new Rule 506(c) of Regulation D provided that all purchasers are "accredited investors" as defined in Rule 501(a) of Regulation D;
  • provide that issuers must take "reasonable steps" to verify the accredited status of investors as a condition of the exemption in Rule 506(c) offerings in which general solicitation is used. The verification requirement would be in addition to the requirement that purchasers be accredited investors: it is a condition to the Rule 506(c) safe harbor even if all the purchasers in fact meet the standards of one or more of the enumerated categories in the Rule 501 definition of accredited investor, or the issuer reasonably believes that they meet them, unless the issuer has actual knowledge that an investor meets such requirements.
  • preserve an issuer's option to conduct a private offering under renamed Rule 506(b) without engaging in general solicitation and without subjecting itself to the new requirement to take reasonable steps to verify that the purchasers are accredited;
  • amend Form D to provide boxes to check if the issuer is relying on Rule 506(b) or Rule 506(c); and
  • permit general solicitation in offerings under Rule 144A provided that securities are purchased only by Qualified Institutional Buyers ("QIBs") (as defined in that Rule). Notwithstanding some limited guidance from the SEC on the subject of general solicitation, its definition and the scope of permitted general solicitation activities remain unclear (see note 2).

I. Proposed Amendments to Rule 506 and Form D

The Proposing Release would create a new Rule 506(c) safe harbor from registration of offers and sales of securities under the Securities Act in which general solicitation is used. 5 Rule 506(c) would permit issuers to conduct exempt securities offerings by means of general solicitation under the following conditions:

  • each purchaser of the securities must actually meet the requirements to be an accredited investor in one of the enumerated categories in Rule 501 of Regulation D or the issuer must reasonably believe that the purchaser of the securities meets such requirements (see note 4 above);
  • the issuer must take reasonable steps to verify that the purchasers of the securities are "accredited investors" as defined in Rule 501 of Regulation D; and
  • all terms and conditions of Rule 501 and Rules 502(a) and 502(d) of Regulation D must be satisfied. [footnotes omitted]

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David Mishel is a partner in K&L Gates' San Francisco office and is a member of the Securities Regulation and Enforcement group. He practices in the following areas: broker-dealer, investment adviser and securities regulation and enforcement, and general corporate and securities business transactions.

Nicholas S. Hodge concentrates his practice in securities law with a focus on investment management, hedge funds, private equity funds, real estate investment trusts and partnerships, timber funds, complex partnership reorganizations, and mergers and acquisitions. Mr. Hodge has extensive experience in public and private offerings of securities, SEC and FINRA regulatory requirements, and Investment Advisers Act compliance. He represents numerous domestic and offshore hedge funds, ranging from startup funds to major fund complexes.

Kay A. Gordon is a partner at K&L Gates. She practices in the firm's New York office and concentrates her work in the Investment Management practice, with a particular emphasis on hedge funds, private equity funds and compliance-related matters.

Yusef Alexandrine is an associate in K&L Gates' San Francisco office and a member of the Investment Management practice group. He advises participants in the financial services industry, including investment advisers to hedge funds, private equity funds, and venture capital funds, registered open-end and closed-end funds, exchange traded funds and mutual funds, as well as mutual fund independent directors, investment banks and broker-dealers, on regulatory, transactional and counseling matters involving the securities and commodities laws. He also regularly provides advice with respect to exemptions, no-action letters, and other forms of regulatory relief. In addition, he advises clients on state blue sky issues, particularly California securities law regulatory issues.

Remsen M. Kinne IV is a partner in the San Francisco office of K&L Gates. A member of the corporate practice group, he represents private and public companies in structuring, negotiating and documenting international and domestic investment, acquisition, financing and commercial transactions. He is experienced in the purchases and sales of assets, stock and merger acquisitions, startup, venture, strategic partner and private equity investments, registered and unregistered securities offerings, formation and operation of joint ventures and multijurisdictional holding company structures, and licensing and distribution matters.


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