SEC Adopts Private Offering Reforms Mandated by JOBS Act

Today the SEC adopted amendments to its private offering safe harbors as mandated by the JOBS Act of 2012. These amendments to Rule 506 and Rule 144A under the Securities Act of 1933 will make it possible for companies and funds to use advertising and other forms of mass communication to sell securities to “accredited investors” (including individuals with more than $1 million in net worth, excluding primary residence, or two years of more than $200,000 in annual income, and companies with more than $5 million in assets) and to “qualified institutional buyers” (including institutions with at least $100 million in investment securities). Today, mass communications about a private offering can constitute prohibited “general solicitations” or “general advertising,” and are thus not used in “private placements,” such as those conducted according to the safe harbors found in Rule 506 and Rule 144A.

The amendments will go into effect sometime in September, or 60 days after publication of today’s rulemaking in the Federal Register.

Consumer advocates have expressed concern that elimination of the ban on general solicitation or advertising could adversely affect the investing public, even though the JOBS Act did not expand the universe of potential private-placement buyers. In response to these concerns, the SEC today also proposed amendments to Regulation D, Form D and Rule 156 under the Securities Act that are intended, in the SEC’s words, to enhance the regulator’s “ability to evaluate the development of market practices in Rule 506 offerings.” The proposed rules were issued on a 3-to-2 vote, with both Republican commissioners viewing the proposals as designed to restrict usage of Rule 506 on a basis inconsistent with the JOBS Act, and not simply to enhance the SEC’s ability to evaluate market developments. Comments on the proposals will be due at the same time the Rule 506 and Rule 144A amendments take effect.

We will circulate a memo with our thoughts on the proposals, as well as a more detailed examination of the Rule 506 and Rule 144A amendments, in the coming days.

Rule 506 Private Placements to Accredited Investors

The amendment to Rule 506 permits a company or fund to engage in general solicitation or advertising while offering and selling securities on a non-SEC-registered basis, as long as all purchasers of the securities are accredited investors and the company or fund takes reasonable steps to verify that the purchasers are accredited investors. The amendment includes a non-exclusive list of methods that companies and funds may use to satisfy the verification requirement for purchasers who are natural persons.

To take advantage of the Rule 506 safe harbor, a company or fund must file a Form D with the SEC. The SEC is revising Form D to require companies and funds to indicate whether they are relying on the provision that permits general solicitation or advertising in a Rule 506 offering.

Currently under Rule 506, companies and funds are required to file a Form D within 15 days of the first sale of securities, and are required to report additional sales through amended filings only under certain conditions. Under the SEC’s proposals issued today for comment, if a company or fund intends to use general solicitation or advertising to offer securities, it would be required to file an “Advance Form D” no later than 15 days before the first use of general solicitation or advertising, and would be required to amend the form for each new offering. The SEC’s proposed rules issued for comment today would also require that all general solicitation material be provided to the SEC. The proposal issued today for comment would also ban a company or fund from using Rule 506 if it or any of its “affiliates” failed to file a Form D in the past five years. Given the broad definition of “affiliate” under SEC rules, this proposal could have a significant effect on the use of Rule 506.

In a companion release, the SEC also adopted amendments to Rule 506 designed to disqualify companies and funds from relying on Rule 506 if “felons and other bad actors” are participating in the Rule 506 offering.

Rule 144A Private Placements to Qualified Institutional Buyers

The amendment to Rule 144A provides that securities may be offered pursuant to Rule 144A to persons other than qualified institutional buyers (i.e., they may be offered via general solicitation or advertising), as long as the securities are only sold to persons that the seller reasonably believes are qualified institutional buyers.

Private Funds

Despite significant pressure on the SEC to prevent private funds from engaging in public marketing, the SEC did not exclude private funds from the scope of today’s amendments. The proposed amendments to Regulation D would, however, impose additional requirements – primarily disclosure-related – on private fund general solicitation materials, but would stop short of applying the full mutual fund advertising regime to private funds. Significantly, the proposal would impose content requirements for offerings by private funds, including specific requirements for advertisements containing performance data. The SEC also proposed to amend Rule 156 to make it applicable to private funds. Rule 156 provides guidance as to the types of information in fund sales literature that can be deemed misleading to investors.

Any private fund manager intending to take advantage of general solicitation or advertising under amended Rule 506 should also consider whether this would be consistent with exemptions it may rely upon under the Commodity Exchange Act or the rules of the Commodity Futures Trading Commission.