Rule 506 and General Solicitation

On August 31, 2012 the SEC issued proposed rules that would eliminate the prohibition against general solicitation and advertising in Rule 506 offerings.  The SEC has requested comments on the proposed rules within 30 days.  You may provide your comments here.

Below are some major highlights, but you can view the entire SEC Release No. 33-9354 here.

  • The SEC has created has created a new rule- Rule 506(c).  Offerings under this new Rule do not have to comply with the prohibition on general solicitation and advertising under Rule 502(c).
  • Under Rule 506(c) issuers have advertise their offering provided that:
    • all investors or purchasers of securities must be an accredited investor;
    • the issuer takes “reasonable steps” to verify that the purchasers qualify as accredited investors at the time of the investment; and
    • all terms and conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied.
  • The “reasonable steps” to be taken by the Issuer is an objective determination, based on the particular facts and circumstances of each transaction.  There SEC has not provided a list of methods to be used in satisfying the requirement, rather, they maintain that each situation and each investor will merit separate actions to verify the accredited status.  The SEC does however, advise the Issuer to keep records of the steps they took to verify the accredited status.
  • Form D is revised to include a check box indicating the Issuer is offering securities under the new Rule 506(c).
  • The new Rule does not eliminate the ability for an issuer to conduct the “traditional” 506 offering. The issuer may continue to offer securities by the same 506 offering as before-without general solicitation or advertising.

As you know, lifting the ban on general solicitation has been a hot topic in the Securities realm. It could possibly open additional sources of funding for struggling smaller reporting companies and startups.  It appears as if the SEC has the many comment letters it received into consideration when drafting this proposed Rule. In the “reasonable steps to verify” section they cite several arguments made as to why or why not there should be a checklist of sorts of steps to verify the accredited status.  I appreciate the fact that the SEC maintained the integrity of the existing Rule 506 while also not making the new Rule 506(c) too complicated to use.

The SEC has 30 days to consider comments and release the final Rule.

This entry was posted in IPO, JOBS Act, Legislation, Reg D 506, Rule 506(c), Securities Offerings, Small Business Management and tagged , , , , , , , , , , . Bookmark the permalink.

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