SEC Finally Lifts General Solicitation Ban

private fund attorney NYCThe SEC has finally approved a new rule to lift the ban on general solicitation or general advertising for certain private securities offerings. The rule amendments become effective in September.

To put it into context: As we have previously discussed on this blog, companies seeking to raise capital through the issue of securities must either register the securities with the SEC or rely on an exemption from registration, most commonly Rule 506 of Regulation D. Reg D provides a safe harbor for offerings to accredited investors.  One of the requirements of Rule 506 as we know it was that there be no general solicitation or advertising as part of the offering.

The JOBS Act directed the SEC to remove this prohibition, as long as the issuer takes reasonable steps to verify that all investors are accredited.

The JOBS Act specifically tasked the SEC with defining what constitutes “reasonable steps” to verify that investors are indeed “accredited.”  The SEC’s final rule largely mirrors its initial rule proposal, which stated that the determination of “reasonableness is an objective assessment by the issuer.” However, in addition to requiring that an issuer consider the facts and circumstances of each purchaser and the transaction, the final rule now also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement.

Examples include:

  • Copies of any IRS form that reports the income of the purchaser and a written representation that the purchaser will likely continue to meet the income test in the current year; or
  • Written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that the issuer has taken reasonable steps to verify the investor’s accredited status.

While the new rule is the SEC’s great and long-awaited first step towards addressing the JOBS Act mandate, there are new rules imposing more issuer disclosures, among other things, that you must keep in mind when doing a 506 private placement. Read about it in our next post.

As always, if you have questions or comments, please call, e-mail or tweet me @Bettina Eckerle. Of course I’ll keep you posted when the real news come out.

Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz.  She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.