JOBS Act – “General Solicitation” in Private Offerings: SEC Proposes Amendments to Rule 506 and Rule 144A to Remove the ProhibitionSullivan & Cromwell LLP - August 30, 2012
On August 29, 2012, the SEC proposed amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act to eliminate the prohibition on general solicitation in transactions effected under those rules, as required by Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”).
The proposed rules provide the following:
- Rule 506 would be amended to add paragraph (c), providing a new and separate exemption under the Rule that would permit an issuer to use general solicitation and general advertising to offer securities, provided that the issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.
- The proposed rules would continue to apply the “reasonable belief” standard to the condition that all purchasers are accredited investors.
- Whether the steps taken by the issuer to verify the accredited investor status of the purchasers are “reasonable” would be an objective determination, based on the particular facts and circumstances of each offering and investor. The proposed rules do not prescribe particular verification procedures.
Additionally, the SEC confirmed in the proposing release that:
- Consistent with the historical treatment of concurrent Regulation S and Rule 144A/Rule 506 offerings, concurrent offshore offerings that are conducted in compliance with Regulation S would not be integrated with domestic unregistered offerings that are conducted in compliance with Rule 506 or Rule 144A, as proposed to be amended.
- Privately offered funds would be permitted to make a general solicitation under amended Rule 506 without losing the ability to rely on Sections 3(c)(1) and 3(c)(7) of the Investment Company Act, which provide commonly used exclusions from the definition of “investment company”.
Comments on the proposed rules will be due 30 days after publication in the Federal Register. Sullivan & Cromwell LLP is planning to submit a comment letter.