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