SEC Issues Guidance on Private Placements Involving General Solicitation

 Yesterday, the SEC issued new C&DIs related to Rule 506(c) offerings.  The new C&DIs provide guidance on various aspects of Rule 506(c) offerings including the following:

  • If an issuer commenced an offering in reliance on Rule 506 before September 23, 2013 and decides to continue that offering after September 23, 2013 in accordance with Rule 506(c), the issuer must file an amendment to the previously-filed Form D to indicate that the issuer is now relying on the Rule 506(c) exemption.  If the issuer decides to continue the offering in reliance on Rule 506(b), no amendment to the previously-filed Form D is required solely to reflect this decision. 
  •  An issuer will not lose the ability to rely on Rule 506(c) for an offering if a person who does not meet the criteria for any category of accredited investor purchases securities in the offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor at the time of the sale of securities. 
  •  An issuer will not be able to rely on the Rule 506(c) exemption for an offering if the issuer does not take reasonable steps to verify the accredited investor status of purchasers (even if the purchasers  actually meet the financial and other criteria to be accredited investors).  The verification requirement in Rule 506(c) is separate from and independent of the requirement that sales be limited to accredited investors.  The verification requirement must be satisfied even if all purchasers happen to be accredited investors.  Under the principles-based method of verification, however, the determination of what constitutes reasonable steps to verify is an objective determination based on the particular facts and circumstances of each purchaser and transaction. 
  •  An issuer may satisfy the verification requirement of Rule 506(c) by either using the principles-based method of verification or relying upon one of the specific, non-exclusive verification methods listed in the rule.  Although the use of the non-exclusive verification methods is not required, an issuer that chooses to use one of such methods must satisfy the specific requirements of that method.  In order to comply with the net worth verification method provided in the rule’s non-exclusive list, the relevant documentation must be dated within the prior three months of the sale of securities.  If the documentation is older than three months, the issuer may not rely on the net worth verification method, but may instead determine whether it has taken reasonable steps to verify the purchaser’s accredited investor status under the principles-based method of verification.
  •  The third-party verification method in the non-exclusive list of verification methods in Rule 506(c) includes written confirmations from an attorney or certified public accountant who is licensed or duly registered, as the case may be, in good standing in a foreign jurisdictionThis method of verification is not limited to written confirmations from attorneys and certified public accountants who are licensed or registered in a jurisdiction within the United States. 
  •  The verification method for existing investors in the non-exclusive list of verification methods does not apply to new issuers that have the same sponsor as the issuer in which the investor purchased securities in a prior Rule 506(b) offering. This non-exclusive method of verification is, by its terms, limited to verification of existing investors who purchased securities in the same issuer’s Rule 506(b) offering as accredited investors prior to September 23, 2013 and continue to hold such securities. 
  •  If an issuer commences an offering intending to rely on Rule 506(c) but does not engage in any form of general solicitation in connection with the offering, the issuer may subsequently determine to rely on Rule 506(b) for the offering, as long as the conditions of Rule 506(b) have been satisfied with respect to all sales of securities that have occurred in the offering.  To the extent the issuer already filed a Form D indicating its reliance on Rule 506(c), it must amend the Form D to indicate its reliance on Rule 506(b) instead, as that decision represents a change in the information provided in the previously-filed Form D. 
  •  If an issuer commenced an offering in reliance on Rule 506(b), the issuer may determine, prior to any sales of securities in the offering, to rely on Rule 506(c) for the offering, as long as the conditions of Rule 506(c) are satisfied with respect to all sales of securities in the offering.  To the extent the issuer already filed a Form D indicating its reliance on Rule 506(b), it must amend the Form D to indicate its reliance on Rule 506(c) instead, as that decision represents a change in the information provided in the previously-filed Form D. 
  •  If the conditions of Rule 506(c) are not met in a purported Rule 506(c) offering, the issuer will not be able to rely on Securities Act Section 4(a)(2) private offering exemption if the issuer engaged in general solicitation.  The use of general solicitation continues to be incompatible with a claim of exemption under Section 4(a)(2). 

 

 

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