Business & Corporate Section Article

SEC Implements JOBS Act Requirements and Liberalizes Restrictions on Advertisements

On July 10, 2013 the Securities and Exchange Commission (“SEC”) voted 4 to 1 to lift an 80-year-old ban on advertisements for private offerings. The recommendation to lift the ban on general solicitation was first proposed in The Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) which 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 proposed ruling does not change the fact that issuers can still raise an unlimited amount of capital from an unlimited amount of “accredited investors.” The new rule will take effect on September 21, 2013.

In short this means that many private issuers, including hedge funds, private equity funds and start-up companies will be able to publicly advertise potential investment opportunities. However, if a private issuer advertises in reliance on Rule 506(c) and the offering fails to meet the requirements of Rule 506(c), private issuers will not be able to rely on the exemption found in Section 4(2)(a) of the Securities Act of 1933, as amended. This new opportunity for solicitation is not without additional procedural safeguards. The SEC also proposed changes, which requires issuers who utilize general solicitation to file a Form D with the SEC at least 15 days prior to the beginning of general solicitation, and to also file an amended Form D with 30 days after the close or termination of the offering. Typically, issuers only have to file a Form D within 15 days of first offering. Failure to follow these newly adopted procedures when conducting general solicitation can result in a ban by the SEC of the issuer’s sale of subsequent securities for up to a year.

Further, the SEC has proposed Rule 510T, which would require issuers to submit any written material used in their Rule 506(c) offerings to the Commission no later than the date of their first use. The SEC proposes that this requirement would be on a temporary basis – specifically as to evaluate the changes subsection (c) will have on the Rule 506 market and enable the SEC to collect more market data such as the amount of capital raised in these offerings. In order to appease issuers who are worried about the dissemination of detailed company information, the SEC indicated that these general solicitation materials would not be made available to the public.

The biggest change resulting from this vote is issuers will no longer be able to “check the box” to verify the status of accredited investors. Rather, issuers now will have to take reasonable steps to verify that their investors are accredited. The SEC is expected to publish a non-exhaustive list of those steps.

In a parallel move, the SEC adopted new Rule 506(d) as required by Section 926 of Dodd-Frank. Rule 506(d) will prohibit felons or other bad actors from relying on the registration exemptions of Rule 506.  Rule 506(d) also provides an exception from disqualification if an issuer can show that it did not know, and could not have known, that a disqualification existed after conducting a reasonable factual inquiry.  Additionally, the SEC revised Form D to add a certification by those relying on Rule 506 that the offering is compliant with Rule 506(d).
The predictions of hedge fund billboards and late night infomercials advertising investment opportunities appear to be overblown.  Indeed there are some who believe the SEC is giving with one hand and taking with the other. There may not be many issuers relying on Rule 506(c) until additional safeguards are clarified or enacted.1 Moreover, many private issuers may not believe the ability to generally solicit under a Rule 506(c) offering will be worth the additional risk and compliance requirements.2

Lastly, it should also be noted that these changes do not effect FINRA regulations governing broker-dealers. Thus, for the 13% of Rule 506 offerings which use a financial intermediary, FINRA still requires a preexisting business relationship to complete a sale even though issuers may have a business relationship with the individual.

By some, this new round of amendments by the SEC would hardly be considered a sweeping change.

-- By Dillon Colucci and Christopher Gabbard

**This article is intended for informational purposes only and does not constitute legal advice. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**

1 The SEC has published a non-exclusive list of “principle-based methods for verification,” which was published July 23, 2013.

2 Over 59% of Regulation D offerings are for less than $ 2 million according to the SEC. In situations such as these, general solicitation is unlikely to be necessary.