SEC Lifts Ban on General Solicitation and General Advertising for Certain Private Placements

July 11, 2013

On July 10, 2013, the United States Securities and Exchange Commission (the “SEC”) in an open meeting approved two items that were mandated by the Jumpstart Our Business Startups Act (the JOBS Act) and Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and also a third item – a proposal for additional rule-making. The three items are:

(i) amendments to Rule 506 of Regulation D (“Rule 506”) and Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), to eliminate the ban on general solicitation and general advertising for certain private offerings,

(ii) amendments to Rule 506 to disqualify securities offerings from reliance on Rule 506 to conduct a private offering involving certain “felons” and other “bad actors”; and

(iii) a proposal to make certain other amendments to Regulation D, Form D and Rule 156 under the Securities Act.

The final rule and form amendments related to (i) and (ii) above will be effective 60 days after publication in the Federal Register (the “Effective Date”). We expect the Effective Date to be around September 15, 2013.

Elimination of the Ban on General Solicitation

The amendment to Rule 506 added new Rule 506(c) which permits an issuer to conduct a private placement of securities under Rule 506 while engaging in general solicitation or general advertising in offering and selling securities, provided that: (i) the offering complies with the general requirements for a Regulation D private placement, which are set forth in Rule 501 and 502; (ii) all purchasers of the securities are accredited investors, as defined under the Securities Act; and (iii) the issuer takes reasonable steps to verify that such purchasers are accredited investors. The amendment to Rule 506 also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement for purchasers who are natural persons. The emphasis of the new rule is on the status of the purchasers, not on the offerees. The SEC also added a new informational item to Form D for issuers to indicate when they are relying on Rule 506(c).

Rule 144A was also amended, and now permits general solicitation in a Rule 144A offering, provided that the securities are only sold to qualified institutional buyers or persons reasonably believed to be qualified institutional buyers.

The elimination of the ban on general solicitation applies to the issuer and anyone acting on behalf of the issuer.

Addition of “Bad Actor” Disqualifications to Rule 506

The SEC also amended Rule 506 to disqualify issuers and other market participants from relying on Rule 506 if “felons” and other “bad actors” are participating in the Rule 506 offering. The exemption under Rule 506 will not be available for a sale of securities if certain covered persons engage in disqualifying events. Disqualification would only apply for disqualifying events that occur after the Effective Date; however, disclosures will be required of events that occurred prior to the Effective Date that would have been disqualifying events.

New Proposed Amendments

The SEC proposed other amendments to Regulation D and Form D which would enable the SEC to collect additional data on the effects of eliminating the ban on general solicitation and general advertising. In addition, the proposed rule would require filing of Form D both 15 days before any general solicitation occurred and within 30 days after conclusion of the offering, and would prohibit an issuer that failed to comply with the Form D filing requirement from relying on Rule 506 for a period of five years, with certain cure periods. Another rule proposal would require certain specified legends on Regulation D offering materials and materials used by private funds that contain performance data. The SEC also proposed amendments to Rule 156 under the Securities Act that would apply the rule’s anti-fraud guidance to sales literature used by private investment funds relying on Rule 506(c).

If you have any questions regarding the changes described above, please contact your Seward & Kissel LLP Capital Markets Group or Broker-Dealer Practice Group attorney.