Proposing Amendments to Private Offering Rules
SEC Open Meeting
July 10, 2013
Current Offering Process
Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the exemptions from registration prohibit companies from engaging in general solicitation or general advertising - that is, advertising in newspapers or on the Internet among other things - in connection with securities offerings. Rule 506 of Regulation D is the most widelyused exemption from registration.
In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of "accredited investors" and up to 35 nonaccredited investors. Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels.
In April 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act). Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506 provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors. By requiring the SEC to remove this general solicitation restriction, Congress sought to make it easier for companies to find investors and thereby raise capital.
While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that "require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission." In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities.
Comments on the 2012 Proposal
Last August, in order to comply with the Congressional mandate to implement Section 201(a)(1) of the JOBS Act, the Commission proposed a rule that would remove the general solicitation ban in certain Rule 506 offerings in which sales would be limited to accredited investors and issuers would be required to take reasonable steps to verify such accredited status. After doing so, the Commission received comments from a wide range of commenters including issuers, investor organizations, individuals, law firms, state government officials, and professional and trade associations.
Some of these commenters suggested that the SEC consider measures that they believed would provide additional protections for investors in connection with removing the general solicitation ban. Several suggestions related to the notice that is required to be filed by an issuer in connection with a Rule 506 offering. This notice, called Form D, is filed with the SEC and available for review by the public. Other suggestions included changing the definition of accredited investor, imposing requirements governing the content and manner of general solicitations, and requiring issuers to file general solicitation materials with, or submit them to, the SEC.
New Rule Proposal
The Commission approved a proposal intended to enhance the SEC's ability to assess developments in the private placement market now that the rule to lift the ban on general solicitation has been adopted. In particular, the proposal would improve the SEC's ability to evaluate the development of market practices in Rule 506 offerings and would address certain concerns raised by investors related to issuers engaging in general solicitation.
The proposal requires issuers to file an advance notice of sale 15 days before and at the conclusion of an offering…
Currently, an issuer - such as a company or a fund - selling securities using Rule 506 is required to file a Form D no later than 15 calendar days after the first sale of securities in an offering. That form is a type of notice that provides information about the issuer and the securities offering.
The proposal requires issuers to provide additional information about the issuer and the offering…
Currently, Form D requires identifying information about the company or the fund selling the securities, any related persons, the exemption the issuer is relying on to conduct the offering, and certain other factual information about the issuer and the offering.
The additional information would include:
The proposal disqualifies issuers who fail to file Form D…
Under the proposal, an issuer is disqualified from using the Rule 506 exemption in any new offering if the issuer or its affiliates did not comply with the Form D filing requirements in a Rule 506 offering. As proposed, the disqualification would continue for one year beginning after the required Form D filings are made. Issuers would be able to rely on a cure period for a late Form D filing and, in certain circumstances, could request a waiver from the staff.
The proposal requires issuers to include legends and disclosures in written general solicitation materials…
Under the proposal, issuers are required to include certain legends or cautionary statements in any written general solicitation materials used in a Rule 506 offering.
The proposal requires issuers to submit written general solicitation materials to the SEC…
Under the proposal, issuers are required to submit written general solicitation materials to the Commission through an intake page on the SEC website. Materials submitted in this manner would not be available to the general public. As proposed, this requirement would be temporary, expiring after two years.
The proposal extends guidance about misleading statements to private funds…
Currently, an SEC rule provides guidance on when information in sales literature by an investment company registered with the SEC could be fraudulent or misleading for purposes of the federal securities laws.
The proposal is now subject to a 60-day public comment period.