By Thomas C. Grella

Finally!  After more than a year, the SEC has issued regulations that allow implementation of the provisions of the Jumpstart Our Business Startups Act (better known as the JOBS Act) which eliminate the ban on general solicitation in Rule 506 and Rule 144A offerings.  The Jobs Act, which had bipartisan support (for instance the President, and 10th District of North Carolina Congressman Patrick McHenry, generally on opposite sides on many issues, were two of the biggest supporters of this legislation) was enacted on April 5, 2012.  The Act, by its very terms, could really only be implemented after regulations were created by the SEC.  Because of what appears to me to have been political maneuvering, the regulations necessary to implement that portion of the Act interpreting general solicitation (and several other beneficial aspects of the Act) had to await a change in leadership of the SEC.  That change occurred and finally, after more than a year, regulations are now in place.

The regulations regard both Rule 506 offerings solely to accredited investors, as well as Rule 144A offerings normally to qualified institutional buyers.  Because our Firm has historically helped many of our clients with Regulation D private placement offerings, I will solely focus on Rule 506 offerings in this blog post.  I also note that this blog post is being written to give general information, and is written in familiar terms as opposed to specific legal terminology.

According to the terms of the new regulations, issuers of Rule 506 placements may now engage in general solicitation and general advertising in offering and selling securities (note that I have deleted the word “private” before “placement” because one could argue that the allowance of general solicitation and advertisement makes such a placement in some sense “public”), so long as all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that purchasers actually are accredited.  In the past this form of promotion was disallowed, and issuers in 506 private placements generally had to be able to show some pre-existing personal contact or relationship between those individual people promoting the securities for the issuer entity, and those individual potential purchasers.  Presumably, new forms of promotion will include Internet based marketing and solicitation; but I have even heard promotions of “accredited investor” securities on satellite radio in recent days.

In every Rule 506 offering solely to accredited investors, it was generally believed that the burden was always on the issuer of the securities to assure that investors were accredited, however there was no regulatory help to assure the issuer that it had done enough to prove accreditation, and to keep out of trouble in sales to those who appeared (or falsely represented themselves) to be accredited, but turned out to not be.  The regulations contain what is termed a “non-exclusive list of methods that are deemed to satisfy the verification requirement under Rule 506(c).”

The regulations provide that issuers will need to make an objective determination of “accredited investor” status of a purchaser based on factors provided in the regulations.  The regulations restate that though the burden is always on the issuer to prove the right to use of an exemption (such as Rule 506) from securities laws, the SEC does not believe that Congress intended to eliminate the “reasonable belief” standard (that an issuer must have that an investor is accredited – “…we continue to recognize that a person could provide false information or documentation to an issuer in order to purchase securities…even if an issuer has taken reasonable steps to verify that a purchaser is an accredited investor it is possible that a person nevertheless could circumvent those measures…we believe that the issuer will not lose the ability to rely on Rule 506(c) for that offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was accredited at the time of the sale.”  Affirmation in the regulations of a “reasonable belief” standard, as well as a list of suggested means for verifying accredited investor status will help give some level of assurance to issuers who are offering securities to accredited investors that they do not have any pre-existing relationship with.

The above information is intended only as a general overview of a new regulation (and is not a comprehensive overview either), and not specific legal advice.  The whole regulation may be viewed at the following link:  http://tinyurl.com/mua7e8l  If you need help wading through its extensive contents please let us know at any time (tgrella@mwbavl.com; 828-254-8800).