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SEC Proposes Rule Eliminating Ban on General Solicitation in Rule 506 and Rule 144A Offerings


On August 29, 2012, the Securities and Exchange Commission (“SEC”) proposed amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 (the “Securities Act”) mandated by Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”). The proposed amendments to Rule 506 would eliminate the prohibition against general solicitation and general advertising contained in Rule 502(c) of Regulation D for offers and sales of securities made pursuant to Rule 506, provided that (1) all purchasers are accredited investors and (2) the issuer takes reasonable steps to verify that purchasers of the securities are accredited investors. The proposed amendment to Rule 144A(d)(1) would permit offers of securities pursuant to Rule 144A to persons other than qualified institution buyers (“QIBs”), including by means of general solicitation or general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBs.

Proposed Amendments to Rule 506

Rule 506 is a non-exclusive safe harbor under Section 4(a)(2) (formerly Section 4(2)) of the Securities Act, which exempts transactions by an issuer “not involving any public offering” from the registration requirements of Section 5 of the Securities Act. Under existing Rule 506, an issuer may offer and sell securities, without any limitation on the offering amount, to an unlimited number of “accredited investors,” as defined in Rule 501(a) of Regulation D and to no more than 35-non-accredited investors who meet certain “sophistication” requirements. Rule 506 is currently conditioned on the issuer, or any person acting on its behalf, not offering or selling securities through any form of “general solicitation or general advertising.” General solicitation and general advertising encompasses uses of publicly available media and includes seminars whose attendees have been invited by general solicitation or general advertising and unrestricted websites.

The proposed amendments to Rule 506, which were mandated by Section 201(a) of the JOBS Act, provide that the prohibition against general solicitation1 contained in Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506 provided that:

  •  the issuer takes “reasonable steps” to verify that the purchasers are accredited investors;
  • all purchasers of securities are 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
  • all terms and conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied.2

In addition, the SEC proposes amending Form D, the notice an issuer claiming a Regulation D exemption must file with the SEC, to add a check box to indicate whether an offering is being conducted pursuant to new Rule 506(c) permitting general solicitation.

The proposed amendment does not modify the requirements relating to existing Rule 506, so issuers may continue to conduct Rule 506 offerings without the use of general solicitation. This option may be attractive to issuers who do not wish to be subject to the new requirement to take reasonable steps to verify the accredited investor status of purchasers or who wish to sell to non-accredited investors who meet the Rule 506(b) sophistication requirements.

Commentators on Section 201(a) of the JOBS Act expressed widely differing views on how the SEC should implement the verification mandate in the statute. Some advocated adopting current practices, while others recommended enhanced standards. The SEC declined to specify the methods necessary to satisfy this requirement, on the grounds that requiring uniform verification methods “may be ill-suited or unnecessary to a particular offering or purchaser, given the facts and circumstances.” Rather than provide certainty, the SEC proposes giving issuers flexibility to adopt different approaches to verification depending on the circumstances, to adapt to changing market practices and to implement innovative approaches to meeting the verification. Thus, the proposing release states that whether the steps taken by an issuer to determine accredited investor status are “reasonable” would be “an objective determination, based on the particular facts and circumstances of each transaction.” The SEC stated its expectation that in determining the “reasonableness” of the verification process, issuers would consider several factors, including:

  •  the nature of the purchaser and type of accredited investor that the purchaser claims to be;
  • the amount and type of information that the issuer has about the purchaser; and
  • 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 release provides some guidance with respect to the type of information that might constitute reasonable steps to verify a purchaser’s accredited investor status, such as publicly available information from regulatory filings (e.g., proxy statements reflecting historical compensation or Form 990 filings), third-party information (such as W-2s) or third-party verification as to accredited investor status, such as a broker-dealer, attorney or accountants, provided that the issuer has a reasonable basis to rely on such third-party verification. The release suggests that merely “checking the box” on a questionnaire or signing a form, absent other information or confirmation, will not be deemed sufficient, but the SEC has requested comment on whether there might be circumstances under which such an approach would meet the “reasonable” standard.

As to the relevance of the nature of the offering, the release states that the level of information required may depend on the means through which the issuer publicly solicits purchasers. For example, widely disseminated emails or social media solicitation would likely require greater measures to verify accredited investor status than solicitation from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party.

In all events, issuers will need to retain adequate records documenting the verification process.

By failing to provide an explicit roadmap for verification of accredited investor status, issuers would have to proceed at their own risk in establishing procedures to determine such status. How that will impact the use of the general solicitation option in a Rule 506 offering is unclear, but it could well produce very different approaches depending upon the risk tolerance of the issuer.

Proposed Amendments to Rule 144A

Section 201(a)(2) of the JOBS Act directs the SEC to revise Rule 144A(d)(1) under the Securities Act to permit securities sold pursuant to Rule 144A to be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a QIB. The proposed amendment to Rule 144A would accomplish this by eliminating the reference to “offer” and “offeree” and would also permit general solicitation in connection with resales of securities pursuant Rule 144A, provided purchasers meet this “reasonable belief” standard.

Integration with Offshore Offerings

Regulation S provides a safe harbor for offers and sales of securities outside the United States, but requires, as one of its conditions, that there be no “directed selling efforts in the United States.” The JOBS Act mandate to permit the use of general solicitation in Rule 506 and Rule 144A offerings raised questions regarding the impact of the use of general solicitation on the availability of Regulation S safe harbors for concurrent unregistered offerings inside and outside the United States. (i.e., whether general advertising of a Rule 506 or Rule 144A would violate the Regulation S prohibition on “direct selling efforts.”) In the proposing release, the SEC confirmed its position that offshore transactions made in compliance with Regulation S will not be integrated with unregistered domestic offerings that are conducted in compliance with Rule 506 or Rule 144A, as proposed to be amended. This would appear to permit a Rule 506(c) offering with general solicitation in the United States, provided the advertising does not reference the concurrent Regulation S offering.

Comment Period

The SEC is accepting comments on the proposed rules until October 5, 2012. The full text of the proposed rules and instructions for submitting comments are available for review at: http://www.sec.gov/rules/proposed/2012/33-9354.pdf.


1The proposing release refers to both general solicitation and general advertising as “general solicitation.”

2Rule 501 contains the definitions for Regulation D offerings, Rule 502(a) covers the integration of similar offerings for purposes of complying with Regulation D and Rule 502(d) imposes restrictions on resales of securities purchased in a Regulation D offering. Offerings under proposed Rule 506(c) would also not be subject to the information requirements in Rule 502(b), because all purchasers in proposed Rule 506(c) offerings would be accredited investors.

©2012 Hinckley Allen. This publication is not intended to be legal advice, but is intended only to inform the reader of recent developments in the law. The enclosed materials are provided for educational and informational purposes only, for the use of clients and others who are interested in the subject matter. If legal advice is required concerning a particular matter, your attorney should be consulted.