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). 

 

 

The SEC Proposed Extensive Additional Requirements for the General Solicitation of Investors Under Rule 506(c)

In addition to adopting the final rules governing general solicitation and advertising in connection with certain securities offerings where all purchasers are accredited investors, on July 10, 2013, the SEC also proposed new rules that in the SEC’s words are intended: 

to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506.

All of the excitement all the hoopla over the past few days about the adoption of new general solicitation and advertising rules has been somewhat tempered by concern that these proposed rules will adversely impact the use of general solicitation in Rule 506(c) private placements under Regulation D.

Regulation D and Form D 

With respect to Regulation D and Form D, the proposals would, if adopted:

Add a new Rule 510T Requiring Issuers to Submit to the SEC General Solicitation Materials.  

New Rule 510T would require issuers, on a temporary basis, to submit (not “file” or “furnish”) to the SEC any written general solicitation materials used in a Rule 506(c) offering no later than the date the materials are first used in connection with the offering.  The SEC did not, however proposed that these materials, when filed with the SEC, be publicly available.  The rule would expire two years after its effective date.  The SEC believes that the collection of these materials will facilitate its assessment of market practices through which issuers solicit purchasers in Rule 506(c) offerings.  Prior to the effectiveness of Rule 510T, the SEC will make available an intake page on the SEC’s website to allow issuers, investors and other market participants to voluntarily submit any written general solicitation materials used in connection with a Rule 506(c) offering. 

Compliance with Rule 510T would not be a condition of the Rule 506(c) exemption.  Instead, Rule 507(a) would be amended to provide that Rule 506 would be unavailable for an issuer if the issuer, or any of its predecessors or affiliates, has been subject to any order, judgment or court decree enjoining such person for failing to comply with Rule 510T. 

Amend Rule 503 of Regulation D to Require:

  • For issuers that intend to engage in general solicitation pursuant to Rule 506(c), the filing of a Form D no later than 15 calendar days in advance of the first use of general solicitation.  Currently, Rule 503 requires that the Form D be filed within 15 after the first sale.
  • The filing of a Form D amendment within 30 calendar days after the termination of a Rule 506 offering.  Currently, Rule 503 does not require the filing of such a closing Form D. 

Amend Rule 507 to Disqualify Issuers from Using Rule 506 for New Offerings for Failing to Comply with Their Form D Filing Requirements.

The proposed rules automatically disqualify an issuer from using  Rule 506 in any new offering for one year if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with all of the Form D filing requirements in a Rule 506 offering.  The one year disqualification period would not start to run until the required Form D filings had been made and would not affect offerings of an issuer that are ongoing at the time of the filing non-compliance.   In addition, the five year look-back period would not extend back beyond the effective date of the new disqualification rule.  The rule would also provide that if a required Form D or amendment was filed within 30 days after its due date, it would not be considered late for purposes of the new disqualification rule.  The cure period will not be available if the issuer previously failed to comply with a Form D filing deadline in connection with the same offering. 

Currently, issuers are precluded from relying on Rule 506 in connection with a failure to file a Form D only if the issuer, any of its predecessors or affiliates have been subject to a court order enjoining such person for failure to comply with Rule 503, which requires the filing of a Form D.    

Add New Rule 509 Requiring Issuers to Include Legends in Certain Offering Materials. 

A new proposed Rule 509 would require issuers to include certain legends in any written communication that constitutes a general solicitation in any offering conducted in reliance on Rule 506(c) and require additional disclosures for private funds, such as private equity, venture capital and hedge funds in general. 

The generally applicable legends will look familiar to securities law practitioners and would include statements regarding sale only to accredited investors, reliance on an exemption from the registration requirements of the Securities Act, and transfer restrictions under applicable securities laws.

Private funds would be required to include additional legends indicating that the securities offered are not subject to the protection of the Investment Company Act of 1940 and additional disclosures in any written general solicitation materials that include performance data.   

Compliance with these additional disclosure requirements would not be a condition of the Rule 506(c) exemption.  Instead, Rule 507(a) would be amended to provide that Rule 506 would be unavailable if the issuer, or any of its predecessors or affiliates, has been subject to any order, judgment or court decree enjoining such person for failing to comply with Rule 509. 

Amend Form D to Require Additional Information Primarily in Connection with Offerings Conducted in Reliance on Rule 506, such as:

  • The issuer’s publicly accessible website address.
  • For offerings conducted under Rule 506(c), the name and address of any person directly or indirectly controlling the issuer.
  • Information about the size of the issuer (revenues or net asset value) where such information is otherwise publicly disclosed (currently, “decline to disclose” is an option on Form D with respect to this type of information).
  • Additional information about the number and types of accredited investors investing.
  • Additional information about the use of proceeds from offerings conducted under Rule 506.
  • If a registered broker-dealer was used in connection with the offering, whether any general solicitation materials were filed with FINRA.
  • In the case of pooled investment funds advised by investment advisers registered with, or reporting as exempt reporting advisers to, the SEC, the name and SEC file number for each investment adviser who functions directly or indirectly as a promoter of the issuer.
  • For Rule 506(c) offerings, the methods used to verify accredited investor status and the types of general solicitation/advertising used.

Rule 156 Amendments

In addition, the SEC also proposed to amend Rule 156 to apply the guidance in that rule to the sales literature of private funds.  Generally, Rule 156 presently provides guidance on the types of information in investment company sales literature that could be misleading for purposes of the federal securities laws.