In a letter to the SEC, the Federal Regulation of Securities subcommittee of the American Bar Association urged the Commission to expand the number of accredited investors and qualified institutional buyers who may learn about, and participate in, Regulation D offerings as the ban on general solicitation is lifted by the JOBS Act. The existing restrictions limiting sales to purchasers reasonably believed to be accredited investors and qualified institutional buyers would continue under the Section 201 of the JOBS Act framework and thus provide investor protection for these exempt offerings.
Section 201(a)(1) of the JOBS Act instructs the SEC to revise Rule 506 of Regulation D to eliminate the prohibition against general solicitation or general advertising for offers and sales of securities, provided that all purchasers are accredited investors. An issuer relying on revised Rule 506 must take reasonable steps to verify that purchasers are accredited investors.
In the letter, the bar group also suggested that the SEC regulations implementing the Act reflect the existing definition of accredited investor that includes a reasonable belief standard. Moreover, in setting forth the reasonable steps to be taken to verify that purchasers of the securities offered by means of general solicitation or general advertisement in Rule 506 offerings are accredited investors, the regulations should reflect current custom and practice.
In the group’s view, the regulations or the accompanying release should make clear that general solicitation or general advertising employed in a Rule 144A transaction does not impair a Section 4(a)(2) transaction immediately preceding the Rule 144A offering. The SEC should also clarify certain issues relating to the integration of Rule 506 and Rule 144A offerings that use general solicitation or general advertising with other public or private offerings conducted by the same issuer.
The bar group also asked the Commission to confirm that the use by an issuer of general solicitation or general advertising in connection with a Rule 506 or Rule 144A offering would not be deemed to constitute directed selling efforts by that issuer in connection with a contemporaneous offering pursuant to Regulation S under the Securities Act. The subcommittee also asks that regulations provide that the use of general solicitation or general advertising in connection with a Rule 506 or Rule 144A offering will not adversely affect the availability of any exemptions under the Investment Company Act.
The JOBS Act provides that the general solicitation and general offering restrictions do not apply provided that all purchasers of the securities are accredited investors. The
ABA group reads this
provision as referring to accredited investors as defined in Rule 501; that is,
a person who is within one of the specific categories or who the issuer
reasonably believes is within one of the categories. The reasonable belief prong
would be consistent with Section 201(a)(2) of the JOBS Act, with respect to
Rule 144A, which applies if the securities are sold only to persons that the
seller and any person acting on behalf of the seller reasonably believe is a
qualified institutional buyer. The subcommittee asked that that the regulations
confirm this point.
Unlike a Rule 506 transaction, which is an issuer transaction, a Rule 144A transaction is a resale transaction. Often in a Rule 144A transaction, noted the bar group, an initial purchaser acquires securities from an issuer in a Section 4(a)(2) transaction and resells the securities pursuant to Rule 144A. The
believes that it would undermine legislative intent to permit general
solicitation and general advertising in connection with a Rule 144A transaction
if that same solicitation or advertising would deny an issuer the ability to
rely upon Section 4(a)(2) in connection with its sale to the initial purchaser.
The group thus recommends that the Commission clarify that general solicitation
or general advertising in connection with a Rule 144A offering will not impair
the Section 4(a)(2) exempt transaction related to the Rule 144A transaction.
In the past, noted the subcommittee, most side-by-side offerings involving reliance upon Rule 506 or Rule 144A in the
Regulation S outside the US
did not pose concerns regarding directed selling efforts. Issuers have
therefore been confident in proceeding with contemporaneous offerings in which
the offshore component was conducted in accordance with Regulation S. The group cited Release No. 33-6863 (April 24,
1990), adopting Regulation S, providing that permissible activities in
connection with registered or exempt offerings in the United States do not
constitute directed selling efforts in a contemporaneous Regulation S offering.
The bar group urged the SEC to clarify that this guiding principle remains controlling and therefore that permissible activities in an exempt Rule 506 or 144A offering, including general solicitation and general advertising after the adoption of the new rules, do not constitute directed selling efforts in a contemporaneous Regulation S offering.
Although Section 201(b) of the JOBS Act provides that offerings complying with amended Rule 506 must not be deemed public offerings under the federal securities laws as a result of general advertising or general solicitation, there is no comparable reference to a Rule 144A offering. For this reason, the group suggested that SEC rules clearly provide that an offering of fund shares pursuant to Rule 506 or Rule 144A utilizing general solicitation or general advertising will not be a public offering for the purposes of Section 3(c)(1) or 3(c)(7) of the Investment Company Act.