When the Jumpstart Our Business Startups Act (JOBS Act) became law in April of this year, one of its promised jump-start mechanisms was the elimination of the ban on using general solicitations and advertising in private offerings exempt from securities registration, subject to further Securities and Exchange Commission (SEC) rulemaking. On August 29, the SEC proposed its rules to implement the creation of these "public" private offerings.The proposed rules affect the existing Rule 506 and Rule 144A. Rule 506 presently allows an issuer to sell an unlimited number of securities to "accredited investors" (and a small number of nonaccredited investors if additional disclosures are made) but specifically prohibits offerings using "general solicitation or general advertising." Similarly, Rule 144A presently allows resales of restricted securities to "qualified institutional buyers" (QIBs) but without means of a general solicitation. (A QIB is defined as an institution managing at least $100 million in securities or a registered broker-dealer investing more than $10 million in certain securities.) Examples of general solicitations or advertising include print ads, radio and television commercials, seminars and presentations where the attendees were invited by general solicitation or advertising, and even unrestricted websites. RULE 506 PROPOSALS The SEC is proposing a new Rule 506(c) that would essentially disable Rule 502(c), which contains the prohibition on general advertising, and would allow issuers to use general solicitation and advertising to sell securities to accredited investors only. However, the SEC would require under new Rule 506(c) that issuers take "reasonable steps" to verify that the ultimate purchasers of those securities are actually accredited investors. Currently, under Rule 501(a), issuers are merely required to have a "reasonable belief" that an investor is accredited. Because "reasonable steps" is not defined in the new Rule 506(c), determining precisely what it means will likely require a great deal of time and effort by regulators, commentators and practitioners over the next few years. The SEC release states that what is "reasonable" would be an objective determination based on the facts and circumstances of a given situation. The release also offers a suggested framework of factors for issuers to consider in making this determination, including the following:
Jed Davis will be a featured panelist in a CLE program titled, "Implementing the New DFS Cybersecurity Regulation," (click on title to register), sponsored by the Data Law Initiative at Cardozo Law School.
On January 30, Michael Rave and Richard Leu will be speaking at Bank Director's annual conference, Acquire or Be Acquired, in Phoenix, Arizona.
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Jed Davis was quoted in an article, "5 Ways To Keep Cybersecurity Woes From Derailing A Deal," published in Law360.
Eliza Fromberg was quoted in an article, "Equity Crowdfunding Tops $10M Since SEC Rules Took Effect," in Law360.
Eliza Fromberg was quoted in an article, "SEC Boosts Intrastate Crowdfunding, But Hurdles Remain," in Law360. In the article, Fromberg discusses the U.S. Securities and Exchange Commission’s adoption of amendments to the intrastate offering exemption.
Eliza Fromberg was quoted in an article, "JOBS Act's Lift Of Ad Ban Gains Traction With Small Cos.," in Law360. The article is about how the Jumpstart Our Business Startups Act's lifting of advertising bans for certain private placements is finally beginning to gain traction with issuers. Fromberg says she expects 506(c) offerings to pick up as methods of verifying accredited investors become more standard and the use of Internet platforms, which allow smaller companies to bypass intermediaries, become more accepted.