July 18, 2013
Rule 506 (17 C.F.R. § 230.506) of Regulation D has long been available for use by issuers looking to raise potentially unlimited amounts of capital through securities offerings without having to register the offering under the federal Securities Act of 1933 provided that the investment group in any such offering is limited to “accredited” investors and no more than 35 non-accredited investors who meet certain sophistication and experience standards.
One of the limitations that had been imposed on the use of Rule 506 had been that issuers could not engage in “general solicitation” or “general advertising” when looking for investors. However, on July 10, 2013, the Securities and Exchange Commission (“SEC”) announced that it has adopted, pursuant to the celebrated Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), amendments to Rule 506 that included a new Rule 506(c) that provides that the prohibition against general solicitation and advertising will no longer apply to offerings of securities made pursuant to Rule 506(c) provided that all purchasers of securities sold in any offering under Rule 506(c) are accredited investors and certain other conditions are satisfied including the requirement that the issuer take reasonable steps to verify that purchasers of securities sold in such offering are accredited investors. See SEC Release No. 33-9415; No. 34-69959; No. IA-3624; File No. S7-07-12.
Commentators have noted that the easing of the general solicitation and general advertising prohibitions for Rule 506 may well be the most important change in the JOBS Act, at least over the near-term. Rule 506 already has no cap on the amount of capital that can be raised and is available to both public and private companies without the need to comply with specific disclosure requirements for offers and sales solely to accredited investors (although issuers must still comply with the anti-fraud rules included in the federal securities laws). Accordingly, it is not surprising that Rule 506 is already a popular method for raising capital; however, one of the problems had been that the prohibitions on general solicitation often made issuers reluctant to try and reach out beyond accredited investors that already had a pre-existing relationship with them to generate interest in a Rule 506 offering.
It is anticipated that the changes in the JOBS Act will increase the pool of capital available through Rule 506 by allowing issuers to expand their search efforts, using both traditional and social media outlets, without fear that they might run afoul of solicitation and advertising limitations. For example, issuers may now discuss their business activities at investment conferences without worrying about whether or not they are violating the general solicitation ban. However, it is expected that certain issuers may still be reluctant to engage in explicit advertising activities due to concerns that they may appear to be desperate and the additional recordkeeping and verification requirements.
Significantly the SEC did not choose to specifically regulate the form and content of advertising that issuers may use under Rule 506(c), although general anti-fraud prohibitions would certainly apply. Issuers planning to advertise unregistered securities must notify the SEC by checking a box on Form D; however, the primary purpose of this requirement is to assist the SEC in checking to make sure that such issuers are taking the additional steps necessary to ensure that actual purchasers do indeed satisfy the standards for accredited investor status.
Further discussion of Regulation D, as well as various forms and checklists to assisting your clients with compliance, are available in Securities Law Compliance (§§98:1 et seq.) in Business Transactions Solutions, which is available on the Thomson Reuters Legal Solutions site and through Westlaw Next at Business Counselor.