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SEC Proposes Revisions to Regulation D and Rule 144A Allowing for General Solicitation And General AdvertisementAugust 29, 2012
On August 29, 2012, by a 4-1 vote, the Securities and Exchange Commission took steps to implement Section 201(a) of the Jumpstart Our Business Startups Act by proposing revisions to:
- Rule 506 of Regulation D − providing that the prohibition against general solicitation and general advertising contained in Rule 502(c) of Regulation D would not apply to offers and sales of securities conducted pursuant to the exemption in new Rule 506(c), where the issuer had taken reasonable steps to verify that all purchasers of the securities are accredited investors and the issuer reasonably believed all of those purchasers to be accredited investors; and
- Securities Act Rule 144A − allowing for offers of securities to persons other than qualified institutional buyers (QIBs), including by means of general solicitation and general advertising, in offers and sales of securities conducted pursuant to the exemption in Rule 144A, where all purchasers of the securities are reasonably believed to be QIBs.
Comments are due on the proposed revisions to Regulation D and Rule 144A on or before a date that is 30 days after publication in the Federal Register.
Rule 506 of Regulation D. New Rule 506(c) of Regulation D would provide that the prohibition against general solicitation contained in Rule 502(c) shall not apply to offers and sales of securities made pursuant to new Rule 506(c), provided that such securities are sold solely to accredited investors and the issuer takes reasonable steps to verify that all purchasers are accredited investors. Specifically, Rule 506(c) would state:
- (c) Conditions to be met in offerings using general solicitation or general advertising.
- (1) General conditions. To qualify for exemption under this section, sales must satisfy all the terms and conditions of §§ 230.501 and 230.502(a) and (d).
- (2) Specific conditions.
- (i) Nature of purchasers. All purchasers of securities sold in any offering under this § 230.506(c) are accredited investors.
- (ii) Verification of accredited investor status. The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under this § 230.506(c) are accredited investors.
Pursuant to the proposed revisions to Rule 506, any sales of securities made pursuant to a general solicitation or general advertisement must be limited solely to accredited investors. In this regard, consistent with the standard in Section 201(a) of the JOBS Act, revised Rule 506(c) would require that an issuer take reasonable steps to verify that the purchasers of the securities are accredited investors. The Commission declined to propose specific steps to verify the status of a purchaser, stating that whether steps taken are “reasonable” would be an objective determination based on the particular facts and circumstances of each transaction. However, the Proposing Release provides some non-exclusive factors to consider when determining the reasonableness of the steps taken to verify that a purchaser is an accredited investor. These factors include:
- The nature of the purchaser and the type of accredited investor the purchaser claims to be (e.g., a broker-dealer, bank, or individual investor, etc.);
- The amount and type of information the issuer obtains regarding the purchaser;
- The nature of the offering (i.e., the manner in which potential purchasers were attracted to or solicited to participate in the offering); and
- The terms of the offering (e.g., whether there is a minimum purchase amount, etc.).
Pursuant to comments received regarding implementation of Section 201(a) of the JOBS Act, the Commission clarified that the revised rules would not alter the “reasonable belief” standard in the Rule 501(a) definition of an accredited investor − that is, the Rule 506(c) exemption would be available where the issuer had taken reasonable steps to verify that all purchasers were accredited investors and the issuer had a reasonable belief that all purchasers were accredited investors at the time of sale.
In addition, the Commission proposed to preserve the existing Rule 506 exemption. The existing Rule 506 exemption, which permits issuers to offer and sell securities to a limited number of sophisticated non-accredited investors in exempt transactions that do not involve general solicitation or general advertising, would be located in new Rule 506(b).
Rule 144A. The proposed revisions to Rule 144A(d)(1) would provide that securities sold pursuant to Rule 144A may be sold to QIBs by means of general solicitation or general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe to be a QIB. Specifically, Rule 144A(d)(1) would be revised, as indicated, to state:
“The securities are sold only to a qualified institutional buyer or to a purchaser that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer…”
The standards for reasonably determining whether a purchaser is a QIB, contained in Rule 144A(d), remain unchanged.
Regulation S. The Commission noted that the proposed rules would have no impact on the historical treatment of concurrent Regulation S and Rule 506/144A offerings − concurrent offshore offerings conducted outside the United States in reliance on Regulation S will not be integrated with domestic unregistered offerings involving general solicitation, as permitted by revised Rule 506 and Rule 144A.
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For more information regarding this guidance please contact your regular O’Melveny & Myers LLP attorney or the authors of this release.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Martin Dunn, an O'Melveny partner licensed to practice law in in the District of Columbia and Maryland, David Lavan, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, Rebekah Toton, an O'Melveny counsel licensed to practice law in the District of Columbia and Texas, and Bjorn Hall, an O'Melveny counsel licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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