SEC Proposes New Rules Under The JOBS Act

On August 29, 2012, the Securities and Exchange Commission ("SEC" or the "Commission") proposed rules to implement section 201 of the Jumpstart Our Business Startups Act (the "JOBS Act").1 The JOBS Act directed the SEC to eliminate the ban on general solicitation and advertising in offerings made under Rule 506 of Regulation D ("Reg D")2 under the Securities Act of 1933 (the "Securities Act"), provided that all purchasers of the securities are accredited investors. The JOBS Act also prescribed new rules requiring issuers using general solicitation or advertising in private offers to take reasonable steps to verify that purchasers of the securities are accredited investors, using methods determined by the Commission. The JOBS Act similarly directed the Commission to revise Rule 144A3 under the Securities Act to permit unregistered offers of securities to persons other than qualified institutional buyers ("QIBs"),4 including by means of general solicitation or general advertising, provided that the securities are actually sold only to persons that the seller, and any person acting on behalf of the seller, reasonably believes are QIBs.

The SEC emphasizes in the Release that it sought to propose only those amendments that are, in the Commission's view, necessary to implement the mandate in section 201(a) of the JOBS Act, given the tight time frame for compliance. It acknowledged, without currently responding to, public comments suggesting further amendment to the definition of accredited investor, to Form D filing requirements and contents, and to rules governing the content and manner of advertising and solicitations used in offerings conducted under amended Rule 506, particularly with respect to privately offered funds.

Amendments to Regulation D

Section 4(a)(2) (formerly section 4(2)) of the Securities Act,5 exempts transactions by an issuer "not involving any public offering" from the registration requirements of section 5 of the Securities Act.6 Rule 506 is a non-exclusive safe harbor under this section allowing an issuer to offer and sell securities, without any limitation on the offering amount, to an unlimited number of accredited investors,7 and to no more than 35 non-accredited investors who meet certain sophistication requirements. An issuer seeking to comply with Rule 506 today must also comply with a condition under Rule 5028 requiring that neither it, nor any person acting on its behalf, offers or sells securities through any form of "general solicitation or general advertising." Rule 502 explains the terms "general solicitation" and "general advertising" by example as including advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars whose attendees have been invited by general solicitation or general advertising. Interpretive releases and other guidance modernize this list by providing that other publicly available media, such as Facebook postings, unrestricted websites, and email blasts, also constitute general advertising.9

As proposed, new Rule 506(c) would permit the use of general solicitation to offer and sell securities under Rule 506, provided that certain conditions are satisfied. These conditions are:

The issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors At the time of the sale of the securities, all purchasers of securities must be accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they do All terms and conditions of Rules 501, 502(a) and 502(d) must be satisfied10 Notably, the Release preserves the continued availability of existing Rule 506(b) for issuers that either do not engage in general solicitation in their Rule 506 offerings (and thereby do not become subject to the new enhanced requirements to take reasonable steps to verify the accredited investor status of purchasers), or who wish to sell to a limited number of non-accredited investors who meet Rule 506(b)'s sophistication requirements. Retaining the safe harbor under existing Rule 506 may also benefit issuers that have established a pre-existing substantive relationship11 with each investor and offeree insofar as it reduces the additional burdens imposed by Rule 506(c), as proposed, relating to verifying accredited investor status. In addition, section 4(a)(2) of the Securities Act is not itself amended by the JOBS Act, such that the statutory exemption is also still available without compliance with all the stated conditions necessary for the new safe harbor. Finally, it is worth noting that broker-dealers and private fund issuers participating in or conducting offers under the new safe harbor remain subject to limitations of, respectively, the rules of the Financial Industry Regulatory Authority ("FINRA") and the Investment Advisers Act of 1940, as amended (including related rules) (the "Advisers Act"),12 pertaining to marketing, advertising and other communications with the public.

The JOBS Act mandated that issuers using general solicitation be required "to take reasonable steps to verify that purchasers of the securities are accredited investors,"13 and delegated to the SEC to determine what would constitute "reasonable steps." In doing so, the Release emphasizes the SEC's intent to provide a flexible guide to accommodate the different types of issuers that would conduct offerings under proposed Rule 506(c) and the different types of accredited investors that may purchase securities in these offerings. Thus, whether the steps taken are "reasonable" would be based on the particular facts and circumstances of each transaction.

The following factors are relevant in determining whether an issuer's verification process is reasonable:

Nature of the Purchaser. The nature of the investor is one factor. The definition of...