On August 29, 2012, the SEC finally announced its proposed rules to allow for general advertising and solicitation in Rule 506 offerings (for Rule 144A offerings as well, but this blog only discusses the Rule 506 offerings). Upon reading the proposed rules my initial reaction was two-fold. First, what took so long? The proposed rules as promulgated are not overly complicated and it is hard to see why the SEC needed several extensions beyond the 90-day timeframe set forth by Congress. Second, is the SEC setting up issuers for difficult times by not setting forth any specific standards to govern the way general advertising and solicitation is conducted?
Currently Rule 506 does not allow the safe harbor under Section 4(a)(2) if the securities are offered or sold through any form of general solicitation or advertising. Congress, under the JOBS Act, directed the Commission to amend Rule 506 to provide that the prohibition against general solicitation contained in Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506, as so amended, provided that purchasers of the securities are accredited investors. The Commission was tasked with the job of creating the rules whereby issuers can avail themselves of the exemption provided for in Rule 506 utilizing general solicitation and advertising. Under the Commission’s proposed rules, Rule 506 would be amended to add a new Rule 506(c), which would permit the use of general solicitation to offer and sell securities under Rule 506, provided that certain conditions are satisfied. The proposed conditions are: (i) the issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors, (ii) all purchasers of securities must be accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they do, at the time of the sale of the securities, and (iii) all terms and conditions of Rule 501 and Rules 502(a) and 502(d) must be satisfied.
Of these conditions, the first one is really the only one of concern because, if an issuer properly complies with the first condition, they will likely meet the second condition, and the third condition is true of all Rule 506 offerings. Regarding the first condition, in the release the SEC proposes various steps an issuer can take to verify the purchasers are accredited investors, including, but not limited to, (i) the nature of the purchaser and the type of accredited investor that the purchaser claims to be, (ii) the amount and type of information that the issuer has about the purchaser, and (iii) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount. The SEC goes on to state that the issuer could take steps such as looking at publicly-available information on the purchaser, look at W-2s of the purchaser, consider the purchaser’s profession and look at trade publications regarding the income of such professionals, etc. Obviously, if approved, these verification procedures will drastically change the information issuers will require from purchasers if the issuer is conducting a Rule 506 offering utilizing general advertising or solicitation. We will discuss this in more detail if the proposed rules are approved as drafted.
This leads back to my first reaction to these proposed rules, which is, what took so long? The SEC could not comply with Congress’ deadline for proposed rules under the JOBS Act and then after several extensions, come up with proposed rules that seem fairly obvious and not complex. For a regulatory agency that requires its issuers to meet deadlines without exceptions, one would think the SEC would be better at meeting a deadline. My second reaction was where are the standards for the general advertising and solicitation? With no guidelines set forth in the rules, issuers will likely be utilizing means the SEC will not favor, and will also expose issuers to third-party “financing sources” that may not utilize the best means of general solicitation and advertising. While I am not sure exactly what rules I would like to see promulgated regarding this aspect of the JOBS Act I would like to see the SEC discussing the issue. Continue to check back here for further developments.