SEC Proposes Private Placement Rules To Implement JOBS Act
- At an open meeting on August 29, 2012, the Securities and Exchange Commission proposed rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 and Rule 144A under the 1933 Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act. Release No. 33�9354 (Aug. 29, 2012). The proposal was approved by a 4-1 vote. Comments will be due on October 5, 2012.
Rule 506 currently provides a safe harbor from registration requirements for non-public offerings of securities as long as the issuer, or anyone acting on its behalf, does not offer or sell securities through any form of general solicitation. New Rule 506(c) would permit the use of general solicitation to offer and sell securities under Rule 506, provided that the following conditions are satisfied:
* The issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors;
* All purchasers of securities must be accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they do, at the time of the sale of the securities; and
* The general conditions of Rule 506 must be complied with, other than the informational requirements and the ban on general solicitation and advertising. Specifically, securities acquired under proposed Rule 506(c) would be subject to the integration requirements under Rule 502(a) and the resale limitations under Rule 502(d).
The SEC did not propose specific verification methods that an issuer must use or could use in verifying a purchaser's accredited investor status. Instead, whether the steps taken to verify accredited investor status are reasonable would be an objective determination based on the particular facts and circumstances of each transaction.
The draft release explains that issuers would consider a number of factors when determining the reasonableness of the steps used to verify that a purchaser is an accredited investor. These factors include (i) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (ii) the amount and type of information that the issuer has about the purchaser; (iii) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering; and (iv) the terms of the offering, such as the minimum investment amount. After consideration of the facts and circumstance of the transaction, if it appears likely that the purchaser is an accredited investor, the issuer would have to take fewer steps to verify accredited investor status, and vice versa.
Additionally, the draft release proposes a revision to Form D that would add a separate check box for issuers to indicate whether they are using general solicitation or general advertising in a Rule 506 offering. This would enable the SEC to identify 506(c) offerings and to observe how well the 506(c) market is functioning.
Finally, SEC proposed to amend Rule 144A(d)(1) to provide that securities may be offered pursuant to Rule 144A to persons other than qualified institutional buyers, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are qualified institutional buyers.
Commissioner Walters, while supporting the proposal, noted that it failed to consider how to mitigate the unintended harm that might result from the proposal's flexibility in offering securities, especially the possibility of increased fraudulent offerings. She stated that she was disappointed that many of the commenters' suggestions regarding mitigating this harm were not incorporated into the proposal. She requested comments on requiring issuers to file Form D. She stated that regulators need notice and basic information about private offerings to prevent investor harm, and that conditioning the exemption on filing Form D would be an effective and minimally burdensome way to maintain investor protection.
Commissioner Aguilar voted against the proposal. He stated that he would issue a detailed statement on the SEC website and said that his main concern was that the proposal increases investor vulnerability to promoters of fraudulent schemes. Commissioner Aguilar stated that the proposing release acknowledges that eliminating the prohibition against general solicitation could make it easier for promoters of fraudulent schemes to reach potential investors through public solicitation and other methods previously not allowed. He noted that nowhere in the proposal did the staff address any ways to mitigate this concern. Commissioner Aguilar stated that the SEC should have proposed, among other things, (i) amending the definition of accredited investor to require consideration of the investor's financial sophistication; and (ii) amending Form D notice requirements to enhance the timing and content of the form.
Commissioners Paredes and Gallagher supported the proposal, but both argued that an interim final rule, and not a proposal, would have been more appropriate. Commissioner Gallagher pointed out that the proposal initially began as an interim final rule, which would have allowed the staff to implement the necessary changes required by the JOBS Act while at the same time soliciting reactions from the market to examine the effects of those changes. Both Commissioners Paredes and Gallagher were disappointed that this Rule was proposed well beyond the JOBS Act's ninety-day implementation deadline.
Chairman Schapiro responded that the comments the SEC received regarding the Rule indicated that commenters preferred a rule proposal, and not an interim final rule. She stated that the SEC's normal practice is to issue a rule proposal and allow a brief comment period. She acknowledged that a rule proposal, and not an interim final rule, should have been the staff's focus from the outset.
The proposing release was published in the Federal Register today, at
Statements from all five commissioners are available at
Jessica D. Burt, Esquire
Stradley Ronon Stevens & Young, LLP
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