Financial Services Insights - November 2012 - From the Bar...JOBS Act Update: Proposed New Rule to Eliminate Ban on General Solicitation
On August 29, 2012, with only one dissenting vote, the commissioners of the Securities and Exchange Commission (“SEC”) voted to adopt a proposed rule that would eliminate the current prohibition against general solicitation and general advertising in securities offerings conducted under the Securities Act of 1933 (the “Securities Act”) pursuant to Rule 506 of Regulation D and Rule 144A (“Rule 144A”).
Issuing a proposed rule, rather than an interim final rule, calls into question whether the SEC will finalize a general solicitation rule before next year. The SEC has already missed the deadline to repeal the ban on general solicitation and general advertising in private placements as required by the Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law in April 2012. The JOBS Act seeks to spur economic growth by making it easier for smaller companies to raise capital.
Under the current law, private placement issuers may not attract investors by means of general solicitation or general advertising including, without limitation, communications in newspapers, television or radio broadcasts and unsecured website publications. Advocates of lifting this ban believe that the current restrictions prevent many small businesses from gaining access to sufficient sources of capital, while critics argue that the restrictions provide important investor protections and prevent fraud. The existing ban on general solicitation and general advertising remains in effect until the proposed new Rule 506(c) (the “New Rule”) is finalized. Certain rules, including those adopted by the National Futures Association and the U.S. Commodity Futures Trading Commission, will continue to prohibit marketing to the public unless and until repealed or modified.
The New Rule will allow issuers to conduct general solicitation and general advertising in securities offerings; provided the purchasers are limited solely to accredited investors (“AIs”) and, in the case of Rule 144A, qualified institutional buyers (“QIBs”). The SEC specified that issuers must reasonably believe, and take reasonable steps to verify, that the investors are AIs or QIBs. The New Rule does not specify what constitutes reasonable verification methods or what constitutes reasonable belief, but provides that those determinations would be made based on the facts and circumstances at hand (i.e., depending on the nature of the investors and the offering, these standards may vary).
The SEC also stated that there would be a new box to check on Form D that will require issuers to indicate whether or not the offering was conducted pursuant to the New Rule. The SEC plans to use Form D as one method to track the effectiveness of the New Rule, and in particular, any effects that the New Rule may have on capital raising activities.
When implemented, the New Rule will significantly change the way some businesses raise capital through private placement offerings. As long as an issuing company takes reasonable steps to verify that purchasers of its securities are accredited investors and has a reasonable belief that all investors in fact meet an accredited investor standard, the company may employ means of general solicitation and general advertising that are currently prohibited.
While giving some guidance, the New Rule leaves open many questions as to what constitutes reasonable steps to verify, and a reasonable belief that the purchaser is an accredited investor. Also, the New Rule does not propose specific disclosure requirements for acceptable general solicitations or advertising. The current anti-fraud rules under both federal and state securities laws will continue to apply to all private placement offerings. Specifically, these anti-fraud rules (i) prohibit any person from engaging in manipulative, fraudulent or deceptive activities and (ii) require disclosure of all material information regarding an investment.
Chairman Schapiro, who voted in favor of the New Rule acknowledged that there are very real concerns about the potential impact of lifting the ban on general solicitation and “it will be incredibly important for the Commission to take a thorough look at the private placement market in the future.” She concluded, however, that “at this point it is appropriate that [the Commission] undertake this more narrow mandate that Congress placed upon [the Commission] through the JOBS Act.”
The public comment period for the SEC’s proposal expired on October 5, 2012. At this time, there has been no additional action taken by the SEC with respect to the New Rule.
From the Bar… is designed to present our readers with the views of counsel from outside EisnerAmper LLP.
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- From the Bar...JOBS Act Update: Proposed New Rule to Eliminate Ban on General Solicitation