Back in April, I blogged that the most exciting part about the JOBS Act was the potential of solicitation in 506 offerings. See my post here.
At the end of August, the SEC released its proposed rules in this area. See the announcement here, the proposed rule here, and a link to submit comments here. As far as I can tell, the comments are not available for public viewing yet.
The highlights are these:
Under the proposed rules, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that:
- The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
- All purchasers of securities are accredited investors, because either:
- They come within one of the categories of persons who are accredited investors under existing Rule 501.
The issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.
In determining the reasonableness of the steps that an issuer has taken to verify that a purchaser is an accredited investor, the proposing release explains that issuers are to consider the facts and circumstances of the transaction. This includes, among other things, the following factors:
- The type of purchaser and the type of accredited investor that the purchaser claims to be.
- The amount and type of information that the issuer has about the purchaser.
- The nature of the offering, meaning:
- The manner in which the purchaser was solicited to participate in the offering.
- The terms of the offering, such as a minimum investment amount.
The SEC’s proposing release notes that proposing specific verification methods that an issuer must use “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor … We are also concerned that a prescriptive rule that specifies required verification methods could be overly burdensome in some cases, by requiring issuers to follow the same steps, regardless of their particular circumstances, and ineffective in others, by requiring steps that, in the particular circumstances, would not actually verify accredited investor status.”
The proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that companies conducting 506 offerings without the use of general solicitation and general advertising would not be subject to the new verification rule.
The proposed rules would amend Form D, which issuers must file with the SEC when they sell securities under Regulation D. The revised form would add a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and general advertising.