What just happened?
As many of you are aware, the SEC in their meeting on Wednesday, July 10, adopted a rule, as required in the JOBS Act, passed in April of 2012, permitting issuers of securities, under a Reg. D, Rule 506 offering, to use general solicitation and general advertising to offer their securities, provided that the issuer takes reasonable steps to verify that all of the investors are accredited (an individual or joint net worth with their spouse of $1MM, not including their primary residence or an individual whose annual income exceeds $200,000 in each of the two most recent years or a joint annual income with their spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year).
One commentator estimated that approximately only 8% of the households in America meet the accredited investor standard.
Reasonable steps mentioned in the rule (116 pages long!) include:
- · Reviewing copies of any IRS form reporting the income of the investor for the two most recent years and a written representation that the purchaser will continue at the same income level in the current year.
- · Receiving a written confirmation from certain specified individuals that the issuer has taken adequate steps to verify the investor’s accredited status.
What is the effect of this ruling on issuers of securities using a Reg. D, Rule 506 offering?
When an issuer uses the Reg. D, Rule 506 exemption, there will be no restriction on who the issuer can solicit, but the issuer faces restrictions on who is permitted to purchase its securities.
When does this new rule take effect?
60 days after publication in the Federal Register.
Is there anything else I should know?
Yes, there has been an amendment proposed (a mere 186 pages long), which will now be available for a 60 day public comment period before the SEC votes on the amendment.
What are the main points in the amendment I should know about?
1. In addition to the established Form D filing rules, the amendment requires issuers to file an advance notice of sale 15 days before engaging in general solicitation, and an amended notice within 30 days of completing the offering.
2. In addition to the current information required as part of Form D, the amendment requires issuers to provide additional information about the issuer and the methods used in offering the securities to investors.
3. The amendment would prohibit an issuer from using Form D filings for one year, if they fail to follow the new Form D rules.
4. The amendment requires issuers to include legends and certain cautionary disclosures in their general solicitation and advertising material.
5. The amendment will require issuers to submit their written general solicitation materials to the SEC.
So, how does this affect me? Here is how we see it:
There are no changes in advertising or solicitation rules for offerings currently being marketed.
Only after the comment period and final vote on the amendment will we really know how this change will be implemented.
Many syndicators, who are successful in raising money from sophisticated investors, will not change the way they are doing business. Over $1 Trillion was raised in 2012 under the current Reg. D rules.
Certain issuers will take advantage of this new rule and will find new ways to attract accredited investors to their offerings. (Do accredited investors often make investments because of ads they see?)
Stay tuned and we will bring you more information when it is available.