On August 29, 2012, the Securities and Exchange Commission issued its proposed rules to eliminate the prohibition against general solicitation and general advertising in certain securities offerings made pursuant to Securities Act Rules 506 and 144A.  The rules were proposed pursuant to Section 201(a)(1) of the JOBS Act.  The SEC will seek public comment for 30 days after the publication of the rules in the Federal Register.

Under the proposed rules, issuers would be permitted to offer securities using general solicitation and advertising if:

  • The issuer takes reasonable steps to verify that the purchasers are accredited investors; and
  • All purchasers are accredited investors because either:
    • They come within one of the categories of persons who are accredited investors under Rule 501, or
    • The issuer reasonably believes they come within one of the categories at the time the securities are sold.

The proposed rules do not require specific methods to verify accredited investor status.  Instead, the proposed rules require issuers to consider the facts and circumstances of the transaction.  In its release proposing the new rules, the SEC enumerated certain factors issuers should consider and noted that “whether the steps taken are “reasonable” would be an objective determination, based on the particular facts and circumstances of each transaction.” 

For those issuers that do not want to engage in general solicitation and verification procedures, the proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that companies conducting offerings without the use of general solicitation or advertising would not have to comply with the new verification provisions. 

In addition, under the proposed rules, securities sold pursuant to Rule 144A could be offered to persons other than “qualified institutional buyers,” including by means of general solicitation, if the securities are sold only to persons whom the seller and any person acting on the seller’s behalf reasonably believes to be qualified institutional buyers.

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