Thursday, August 30, 2012

SEC Proposes General Solicitation Rules Under the JOBS Act

Just yesterday, the SEC published its proposed rules to eliminate the prohibition on general solicitation of investors required by the JOBS Act. As I mentioned all the way back in last November (and in several posts since), this part of the JOBS Act may be most significant to many of the entrepreneurial clients I represent who are trying to raise early stage capital.
As is almost always the case, the proposed Rules are only a small part of the chore, with much of the rest being left to the reasoning and background contained in the Release.
The Rules address modifications regarding general solicitations in both Rule 506 and Rule 144A  offerings. My educated guess is that most readers of entreVIEW aren’t particularly interested in Rule 144A offerings (made to “Qualified Institutional Buyers”), but many are probably interested in what happens to Rule 506 offerings, by far the most widely used exemption from registration of securities offerings under Regulation D.
I won’t bore you with all the detail in the release, which is 69 pages long (yes, I wasted a hot summer evening digesting it instead of taking a slalom run out on the lake).  The detailed summaries (some of which will be as long as the proposed rules themselves) will be forthcoming from dozens of law firms in the days and weeks to come. Given that they are only proposed rules, I don’t recommend taking the time to even read these summaries because the final rules will, inevitably, be different.
As we knew it would be, the key proposal relates to what “reasonable steps” an issuer selling securities in a 506 offering to all accredited investors must take to “verify” that the investors are accredited.  The SEC release states that “whether the steps taken are ‘reasonable’ would be an objective determination, based on the particular facts and circumstances of each transaction.”  Essentially, the issuer would need to consider a number of factors in determining how to verify accredited status, including:
·        The nature of the purchaser and the type of accredited investor they claim to be;
·        The amount and type of information that the issuer has about the purchaser; and
·        The nature of the offering (manner, terms, minimum investment, etc.)
I had been joking with colleagues that, as securities lawyers, the removal of the prohibition on general solicitation under the JOBS Act may have eliminated about 50% of what we discussed with clients relative to their private offerings. If the proposed rules are ultimately adopted, it looks like we’ll have plenty to talk to clients about regarding verification of accredited status (cynics might claim that lawyers working at the SEC are trying to make sure their brethren in the securities bar stay fully employed).  This is because each set of circumstances will need to be reviewed independently and, likely, with advice of competent securities counsel.
Of course, these are only proposed rules. Given the large volume of comments on the subject already received by the SEC prior to their proposal and the specific litany of questions upon which the SEC is requesting advice, a flood of commentary is likely to ensue during the 30-day comment period.
I guess, as with prior posts on the subject, all I can say with certainty is this—stay tuned for future updates…

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