SEC Issues Additional Transitional Guidance Related to Rule 506 Offerings

Today, the SEC issued new  Compliance and Disclosure Interpretations (C&DIs) related to Rule 506 offerings commenced prior to September 23, 2013, the effective date of the new Rule 506(c) exemption.   

Effective September 23, 2013, a company conducting a private placement under Rule 506 of Regulation D has had a choice of either using Rule 506(b) for a private placement subject to the prohibition against general solicitation or using new Rule 506(c) for a private placement in which securities can be offered through general solicitation provided that all purchasers are accredited investors and the company takes reasonable steps to verify that all purchasers are accredited investors (see our prior blog post for additional information about Rule 506(c)).

The new rule Rule 506(c) exemption was set forth in Securities Act Release No. 9415.  In such release, the SEC explained that for an ongoing offering under Rule 506 that commenced before the effective date of Rule 506(c), an issuer may choose to continue such offering after the effective date in accordance with the requirements of either Rule 506(b) or Rule 506(c). If an issuer chooses to continue the offering in accordance with the requirements of Rule 506(c), any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales of securities that occurred prior to the effective date in reliance on Rule 506(b).

The new C&DIs issued today further clarify this transitional guidance.  Please see below a summary of such C&DIs. 

  • If an issuer
    • commenced a Rule 506 offering before September 23, 2013, and
    • decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415,

the issuer is not required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c).  The issuer must take reasonable steps to verify the accredited investor status of only those investors who purchase securities in the offering after the issuer begins to make offers and sales in reliance on Rule 506(c).    

  • An issuer that commenced a Rule 506 offering before September 23, 2013 and made sales either before or after that date in reliance on the exemption that, as a result of Securities Act Release No. 9415, became Rule 506(b) may rely on the transition guidance in Securities Act Release No. 9415 that permits switching from Rule 506(b) to Rule 506(c) if it already sold securities to non-accredited investors before relying on the Rule 506(c) exemption as long as all sales of securities in the offering after the issuer begins to offer and sell in reliance on Rule 506(c) are limited to accredited investors and the issuer takes reasonable steps to verify the accredited investor status of those purchasers. 

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