Archive for the ‘Securities’ Category


Wednesday, December 4th, 2013

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:  If you need help wading through its extensive contents please let us know at any time (; 828-254-8800).

What are “Securities”?

Wednesday, May 13th, 2009

On what seems like a weekly basis, an existing or potential client will ask me whether the raising of capital for a business venture (a specific proposed plan of investment, purchaser incentive arrangement or some other system of providing a benefit to a participant in exchange, at least potentially, for a return based upon the success of the business endeavor being considered) will amount to an offer of the sale of securities, subjecting the investor with the burden of compliance with the Securities Act of 1933 (either through registration or exemption compliance). Depending upon who you ask, you may find the answer you are looking for with respect to your plan, but as a rule of thumb it is my belief (primarily due to the great risk in the event that you are wrong in your interpretation) that if you are interested in raising capital, or bringing in participants into your business endeavor, realize that the SEC takes a rather broad view of what “securities” are.

When most folks think of securities, they think of the stock exchange, stock in large corporations, hedge funds and the like. They think of stock brokers and dealers, wheeling and dealing on Wall Street. However, securities are not solely limited to equity instruments issued by a corporation. The exchange of a few promissory notes (whether convertible in the future to equity, or not) in exchange for borrowed funds, may be the issuance of “securities”. It is highly recommended that you not make assumptions in this area, and if there is any doubt that you seek competent legal counsel to analyze your plan.

If the plan that is being considered will amount to the issuance of securities, you need to always remember that there are only three possible outcomes of your activity: 1) You take the appropriate steps to register the issuance with the SEC, 2) You take proper steps to exempt the issuance or offer (and appropriate filings are made depending upon the exemption being applied for), or 3) your issuance is illegal. There are no other results, and “illegal” is definitely to be avoided, so I urge you to be careful.

Tom Grella

SEC Form D

Monday, May 11th, 2009

New Look, New On-Line Filing

The requirements of Filing Form D with the Securities And Exchange Commission, for a private placement of securities under Regulation D was changed effective as of March 15 of this year. For many years, the filing of Form D was accomplished by the filing of a paper original and five copies of Form D, through regular or express mail service. The SEC was willing to send back a stamped copy, and it is somewhat unclear the extent to which a filed Form D, absent investor complaint, was ever examined by anyone at the SEC. Now nearing the end of the first decade of the 21st century, the SEC has just mandated a new form, and a new filing mechanism. That mechanism is electronic, and manual filing will no longer be accepted. This newly implemented system is hoped to be a more effective manner for the SEC to gather information and regulate the private placement of securities in the future. It would seem that there will be a little added complication up front, but in the long run it is hoped that electronic filing will be less complicated. Issuers of private securities to be exempted under Rule D will need to obtain an EDGAR filing code in order to file electronically, however filing can be accomplished from any computer with Internet access. There are a few additional pieces of information that will need to be disclosed over the prior form, but a few outdated and unnecessary items of information have been deleted as well. Overall, it is my belief that due to an uptick in private placements (largely due to the fact that private entrepreneurs are finding that with Bank lending being less and less available, and private investors have much less confidence in the stability of the stock market, all making private investment mechanisms more attractive to those looking for capital, as well as those looking to invest) the new electronic filing will, after a normal learning curve for those raising capital and their legal counsel, help streamline the process of private placement securities compliance.

Tom Grella