sec fact sheet-general solicitation-private offering rules-bad actors 10 july 2013

7/28/2019 SEC Fact Sheet-General Solicitation-Private Offering Rules-Bad Actors 10 July 2013

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FACT SHEET

Eliminating the Prohibition on General Solicitation and General

Advertising in Certain Offerings

SEC Open Meeting

July 10, 2013

Background

Current Offering Process

Companies seeking to raise capital through the sale of securities must

either register the securities offering with the SEC or rely on an

exemption from registration. Most of the exemptions from registration

prohibit companies from engaging in general solicitation or general

advertising - that is, advertising in newspapers or on the Internet

among other things - in connection with securities offerings. Rule 506

of Regulation D is the most widely-used exemption from registration.

In an offering that qualifies for the Rule 506 exemption, an issuer may

raise an unlimited amount of capital from an unlimited number of

"accredited investors" and up to 35 non-accredited investors. Under

SEC rules, accredited investors are individuals who meet certain

minimum income or net worth levels, or certain institutions such astrusts, corporations, or charitable organizations that meet certain

minimum asset levels.

JOBS Act

In April 2012, Congress passed the Jumpstart Our Business Startups

Act (JOBS Act). Section 201(a)(1) of the JOBS Act directs the SEC to

remove the prohibition on general solicitation or general advertising for

securities offerings relying on Rule 506 provided that sales are limited

to accredited investors and an issuer takes reasonable steps to verifythat all purchasers of the securities are accredited investors. By

requiring the SEC to remove this general solicitation restriction,

Congress sought to make it easier for a company to find investors andthereby raise capital.


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While issuers will be able to widely solicit and advertise for potential

investors, the JOBS Act required the SEC to adopt rules that "require

the issuer to take reasonable steps to verify that purchasers of the

securities are accredited investors, using such methods as determined

by the Commission." In other words, there is no restriction on who an

issuer can solicit, but an issuer faces restrictions on who is permitted

to purchase its securities.

The law also directed the SEC to amend Rule 144A under the

Securities Act, an exemption from registration that applies to the

resale of securities to larger institutional investors known as qualified

institutional buyers (QIBs). Under current Rule 144A, offers of

securities can only be made to QIBs. Under the new rule, Rule 144A is

amended so that offers of securities can be made to investors who are

not QIBs as long as the securities are sold only to persons whom theseller reasonably believes are QIBs.

2012 Proposal

Last August, in order to comply with the Congressional mandate to

implement Section 201(a)(1) of the JOBS Act, the Commission

proposed a rule that would remove the general solicitation ban for

certain 506 offerings in which sales of securities would be limited to

accredited investors and issuers would be required to take reasonable

steps to verify such accredited status. After doing so, the Commissionreceived numerous comments, including requests seeking greaterclarification on the types of verification that would be considered

reasonable under the rule.

Commenters also suggested that the SEC consider measures that they

believed would provide additional protections for investors in

connection with removing the general solicitation ban. Several of those

additional measures identified by these commenters are included in a

separate proposal that the Commission approved today.

New Rulemaking

Rule 506


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The final rule approved today makes changes to Rule 506 to permit

issuers to use general solicitation and general advertising to offer their

securities provided that:

The issuer takes reasonable steps to verify that the investors are

accredited investors. All purchasers of the securities fall within one of the categories of

persons who are accredited investors under an existing rule (Rule

501 of Regulation D) or the issuer reasonably believes that the

investors fall within one of the categories at the time of the sale

of the securities.

Under existing Rule 501, a person qualifies as an accredited investor if

he or she has either:

An individual net worth or joint net worth with a spouse thatexceeds $1 million at the time of the purchase, excluding thevalue (and any related indebtedness) of a primary residence.

An individual annual income that exceeded $200,000 in each of

the two most recent years or a joint annual income with a spouse

exceeding $300,000 for those years, and a reasonable

expectation of the same income level in the current year.

The determination of the reasonableness of the steps taken to verify

an accredited investor is an objective assessment by an issuer. An

issuer is required to consider the facts and circumstances of each

purchaser and the transaction. Nevertheless, in response tocommenters' requests, the final rule provides a non-exclusive list of

methods that issuers may use to satisfy the verification requirementfor individual investors.

The methods described in the final rule include the following:

Reviewing copies of any IRS form that reports the income of the

purchaser and obtaining a written representation that the

purchaser will likely continue to earn the necessary income in the

current year. Receiving a written confirmation from a registered broker-dealer,

SEC-registered investment adviser, licensed attorney, or certified

public accountant that such entity or person has taken

reasonable steps to verify the purchaser's accredited status.

The existing provisions of Rule 506 as a separate exemption are not

affected by the final rule. Issuers conducting Rule 506 offerings


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without the use of general solicitation or general advertising can

continue to conduct securities offerings in the same manner and aren't

subject to the new verification rule.

Rule 144A

Under the final rule, securities sold pursuant to Rule 144A can be

offered to persons other than QIBs, including by means of general

solicitation, provided that the securities are sold only to persons whom

the seller and any person acting on behalf of the seller reasonably

believe to be QIBs.

Form D

The final rule amends Form D, which is the notice that issuers must file

with the SEC when they sell securities under Regulation D. The revisedform adds a separate box for issuers to check if they are claiming the

new Rule 506 exemption that would permit general solicitation or

general advertising.

What's Next

The rule amendments become effective 60 days after publication in theFederal Register.

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FACT SHEET

Proposing Amendments to Private Offering Rules

SEC Open Meeting

July 10, 2013

Background


Companies seeking to raise capital through the sale of securities musteither register the securities offering with the SEC or rely on an


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exemption from registration. Most of the exemptions from registration

prohibit companies from engaging in general solicitation or general

advertising - that is, advertising in newspapers or on the Internet

among other things - in connection with securities offerings. Rule 506

of Regulation D is the most widelyused exemption from registration.

In an offering that qualifies for the Rule 506 exemption, an issuer mayraise an unlimited amount of capital from an unlimited number of

"accredited investors" and up to 35 nonaccredited investors. Under

SEC rules, accredited investors are individuals who meet certain

minimum income or net worth levels, or certain institutions such as

trusts, corporations, or charitable organizations that meet certain

minimum asset levels.

JOBS Act

In April 2012, Congress passed the Jumpstart Our Business Startups

Act (JOBS Act). Section 201(a)(1) of the JOBS Act directs the SEC to

remove the prohibition on general solicitation or general advertising for

securities offerings relying on Rule 506 provided that sales are limited

to accredited investors and an issuer takes reasonable steps to verify

that all purchasers of the securities are accredited investors. By

requiring the SEC to remove this general solicitation restriction,

Congress sought to make it easier for companies to find investors and

thereby raise capital.

While issuers will be able to widely solicit and advertise for potential

investors, the JOBS Act required the SEC to adopt rules that "require

the issuer to take reasonable steps to verify that purchasers of the

securities are accredited investors, using such methods as determined

by the Commission." In other words, there is no restriction on who an

issuer can solicit, but an issuer faces restrictions on who is permitted

to purchase its securities.

Comments on the 2012 Proposal

Last August, in order to comply with the Congressional mandate to

implement Section 201(a)(1) of the JOBS Act, the Commission

proposed a rule that would remove the general solicitation ban in

certain Rule 506 offerings in which sales would be limited to accredited

investors and issuers would be required to take reasonable steps to


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verify such accredited status. After doing so, the Commission received

comments from a wide range of commenters including issuers,

investor organizations, individuals, law firms, state government

officials, and professional and trade associations.

Some of these commenters suggested that the SEC consider measuresthat they believed would provide additional protections for investors inconnection with removing the general solicitation ban. Several

suggestions related to the notice that is required to be filed by an

issuer in connection with a Rule 506 offering. This notice, called Form

D, is filed with the SEC and available for review by the public. Other

suggestions included changing the definition of accredited investor,

imposing requirements governing the content and manner of general

solicitations, and requiring issuers to file general solicitation materials

with, or submit them to, the SEC.

New Rule Proposal

The Commission approved a proposal intended to enhance the SEC's

ability to assess developments in the private placement market now

that the rule to lift the ban on general solicitation has been adopted. In

particular, the proposal would improve the SEC's ability to evaluate the

development of market practices in Rule 506 offerings and would

address certain concerns raised by investors related to issuers

engaging in general solicitation.

The proposal requires issuers to file an advance notice of sale

15 days before and at the conclusion of an offering

Currently, an issuer - such as a company or a fund - selling securities

using Rule 506 is required to file a Form D no later than 15 calendar

days after the first sale of securities in an offering. That form is a type

of notice that provides information about the issuer and the securities

offering.

Under the proposal, issuers that intend to engage in general

solicitation as part of a Rule 506 offering would, in addition to the

current requirements, be required to file the Form D at least 15

calendar days before engaging in general solicitation for the offering.

Also, within 30 days of completing an offering, issuers would be


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required to update the information contained in the Form D and

indicate that the offering has ended.

The proposal requires issuers to provide additional information

about the issuer and the offering

Currently, Form D requires identifying information about the company

or the fund selling the securities, any related persons, the exemption

the issuer is relying on to conduct the offering, and certain other

factual information about the issuer and the offering.

Under the proposal, issuers are required to provide additional

information to enable the SEC to gather more information on the

changes to the Rule 506 market that could occur now that the generalsolicitation ban has been lifted.

The additional information would include:

Identification of the issuer's website.

Expanded information on the issuer.

The offered securities.

The types of investors in the offering.

The use of proceeds from the offering. Information on the types of general solicitation used.

The methods used to verify the accredited investor status of

investors.

The proposal disqualifies issuers who fail to file Form D

Under the proposal, an issuer is disqualified from using the Rule 506

exemption in any new offering if the issuer or its affiliates did not

comply with the Form D filing requirements in a Rule 506 offering. As

proposed, the disqualification would continue for one year beginning

after the required Form D filings are made. Issuers would be able to

rely on a cure period for a late Form D filing and, in certaincircumstances, could request a waiver from the staff.

The proposal requires issuers to include legends and

disclosures in written general solicitation materials


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Under the proposal, issuers are required to include certain legends or

cautionary statements in any written general solicitation materials

used in a Rule 506 offering.

The legends would be intended to inform potential investors that theoffering is limited to accredited investors and that certain potentialrisks may be associated with such offerings.

In addition, if the issuer is a private fund (a type of pooled investment

vehicle) and includes information about past performance in its written

general solicitation materials, it would be required to provide additional

information in the materials to highlight the limitations on the

usefulness of this type of information. The issuer also would need to

highlight the difficulty of comparing this information with pastperformance information of other funds.

The proposal also requests public comment on whether other manner

and content restrictions should apply to written general solicitation

materials used by private funds.

The proposal requires issuers to submit written general

solicitation materials to the SEC

Under the proposal, issuers are required to submit written general

solicitation materials to the Commission through an intake page on the

SEC website. Materials submitted in this manner would not be

available to the general public. As proposed, this requirement would be

temporary, expiring after two years.

The proposal extends guidance about misleading statements to

private funds

Currently, an SEC rule provides guidance on when information in sales

literature by an investment company registered with the SEC could be

fraudulent or misleading for purposes of the federal securities laws.

Under the proposal, this guidance - contained in Rule 156 under the

Securities Act - would be extended to the sales literature of private

funds. It would apply to all private funds whether or not they are

engaged in general solicitation activities. In the proposing release, the


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SEC would express its view that private funds should now begin

considering the principles underlying Rule 156.

What's Next

The proposal is now subject to a 60-day public comment period.

________________________________________________________

FACT SHEET

Disqualification of Felons and Other "Bad Actors" from Rule

506 Offerings

SEC Open Meeting

July 10, 2013

Background


Companies seeking to raise capital through the sale of securities musteither register the securities offering with the SEC or rely on an

exemption from registration. Rule 506 of Regulation D is the mostwidely-used exemption from registration.

Issuers relying on the Rule 506 exemption are prohibited from

engaging in a general solicitation or general advertising - that is,

advertising in newspapers or on the Internet among other things - in

connection with securities offerings.

Dodd-Frank Act and JOBS Act

In 2010, Congress passed the Dodd-Frank Wall Street Reform andConsumer Protection Act. Section 926 of the Dodd-Frank Act requires

the SEC to adopt rules that would prohibit the use of the Rule 506

exemption for any securities offering in which certain felons and other

bad actors are involved. This section also requires the new rules to be

"substantially similar" to the bad actor disqualification provisions of


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Regulation A, another exemption from registration for certain small

offerings.

After the passage of the Dodd-Frank Act, Congress passed the

Jumpstart Our Business Startups Act (JOBS Act) in April 2012. Section

201(a)(1) of the JOBS Act directs the SEC to remove the prohibition ongeneral solicitation or general advertising for securities offeringsrelying on Rule 506 provided that sales are limited to accredited

investors and an issuer takes reasonable steps to verify that all

purchasers of the securities are accredited. The Commission also will

consider rules to implement this provision today.

Final Rule

Under the final disqualification rule approved today, an issuer cannotrely on the Rule 506 exemption if the issuer or any other person

covered by the rule had a ";disqualifying event."

Covered Persons

The final disqualification rule covers the issuer, including its

predecessors and affiliated issuers, as well as:

Directors and certain officers, general partners, and managing

members of the issuer.

20 percent beneficial owners of the issuer. Promoters.

Investment managers and principals of pooled investment funds.

Persons compensated for soliciting investors as well as the

general partners, directors, officers, and managing members of

any compensated solicitor.

Disqualifying Events

Under the finalrule, a "disqualifying event" includes:

Criminal convictions in connection with the purchase or sale ofa security, making of a false filing with the SEC or arising out of

the conduct of certain types of financial intermediaries. The

criminal conviction must have occurred within 10 years of the

proposed sale of securities (or five years in the case of the issuer

and its predecessors and affiliated issuers).


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Court injunctions and restraining orders in connection with

the purchase or sale of a security, making of a false filing with

the SEC, or arising out of the conduct of certain types of financial

intermediaries. The injunction or restraining order must have

occurred within five years of the proposed sale of securities.

Final orders from the Commodity Futures Trading Commission,

federal banking agencies, the National Credit Union

Administration, or state regulators of securities, insurance,banking, savings associations, or credit unions that

Bar the issuer from associating with a regulated entity,

engagingin the business of securities, insurance or banking,

or engaging insavings association or credit union activities,

or

Are based on fraudulent, manipulative, or deceptive

conduct andare issued within 10 years of the proposed saleof securities.

Certain SEC disciplinary orders relating to brokers, dealers,

municipal securities dealers, investment companies, and

investment advisers and their associated persons.

SEC cease-and-desist orders related to violations of certain

anti-fraud provisions and registration requirements of the federal

securities laws.

SEC stop orders and orders suspending the Regulation A

exemption issued within five years of the proposed sale of

securities.

Suspension or expulsion from membership in a self-regulatory

organization (SRO) or from association with an SRO member.

U.S. Postal Service false representation orders issued within

five years before the proposed sale of securities.

Reasonable Care Exception

The final rule provides an exception from disqualification when the

issuer can show it did not know and, in the exercise of reasonable

care, could not have known that a covered person with a disqualifyingevent participated in the offering.

Disclosure of Pre-Existing DisqualifyingEvents

Disqualification applies only for disqualifying events that occur after

the effective date of this rule. But matters that existed before the


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effective date of the rule and would otherwise be disqualifying are

subject to a mandatory disclosure requirement to investors.

What's Next

The rule amendments will become effective in 60 days after publicationin the Federal Register.

sec fact sheet-general solicitation-private offering rules-bad actors 10 july 2013

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