SEC Issues Guidance on General Solicitation Rules

Investment adviser lawyer NYCOn November 13, the SEC released Compliance and Disclosure Interpretations (“C&DIs”) for the new rules authorizing general solicitation and advertising for securities offerings relying on Rule 506(c) under the Securities Act of 1933.

Key issues clarified are:

  • Rule 506(c) still applies to an offering if it later turns out that not all investors met the “accredited investor” standard, so long as the issuer took reasonable steps to verify that all investors were accredited and it had a reasonable belief that they were accredited at the time of the sale.
  • An issuer may not rely on Rule 506(c) if it did not take reasonable steps to verify the accredited status of investors, even if all of the investors just turn out to be accredited.
  • If an issuer started an offering intending to rely on Rule 506(c) but did not engage in any form of general solicitation, it may rely on Rule 506(b), so long as its conditions have been satisfied.
  • The third-party verification method in Rule 506(c) may include written confirmations from an attorney or certified public accountant who is licensed/registered in a foreign jurisdiction.
  • An issuer may satisfy the verification requirement of Rule 506(c) by either using the principles-based approach or relying on one of the specific methods listed in the rule.
  • In order to comply with the net worth method provided in Rule 506(c), the relevant documentation must be dated within three months of the sale.  If the documentation is older, the issuer may nevertheless take other reasonable steps to verify the accredited status under the principles-based verification method.
  • Where an issuer relying on Rule 506(c) fails to meet its conditions, the issuer may still rely on Section 4(a)(2), as long as it has not engaged in general solicitation.

As always, if you have questions or comments, please call, e-mail or tweet me.

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.