By Cydney Posner
At an open meeting today, the SEC voted to propose rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Reg D and Rule 144A, as mandated by Section 201(a) of the JOBS Act. Here is the proposing release and the press release with associated fact sheet.
Chair Schapiro noted that, in 2011, just over $1 trillion was raised in these exempt offerings, which is comparable to the amount of capital raised in registered offerings during this same period. In light of advances in communication technologies, she had long questioned whether the prohibition against general solicitation was still desirable and had instructed the staff to take a fresh look at the Rule 506 prohibition even before Congress enacted the JOBS Act. While she recognized that there are "very real concerns" about the potential impact of elimination of the ban and believes that the SEC will need to review the private placement rules generally in the future, at this point, she believed that it was appropriate to limit the scope of the proposal to fulfillment of the Congressional mandate.
Commissioner Gallagher, while voting in favor of the substance of the proposal, expressed his desire to vote "no" on the process leading to the proposal. He was displeased that the SEC was voting on a proposal and not on interim final rules as contemplated a few months ago, especially given that Congress's deadline for adoption had already passed.
The proposed rules permit issuers to use general solicitation in Rule 506 and Rule 144A offerings, but require an issuer that uses general solicitation to "take reasonable steps to verify" that all of the purchasers are accredited investors. The reasonableness of the steps "would be an objective determination, based on the particular facts and circumstances of each offering and investor." Under the proposed framework, in determining reasonableness, companies would consider a number of factors, including the nature of the purchaser and the type of accredited investor that the purchaser claims to be, the amount and type of information that the company has about the purchaser, the nature of the offering (e.g., the manner in which the purchaser was solicited) and the terms of the offering (e.g., a minimum investment amount). Companies could continue to use 506 offerings without general solicitation, if, for example, they want to sell to unaccredited sophisticated investors. The proposed amendment to Rule 144A(d)(1) provides that Rule 144A may be offered to non QIBs, provided that sales are only to persons reasonably believed to be QIBs.