Wednesday, August 29, 2012

Implementing JOBS Act Capital Formation Provisions, SEC Proposes Elimination of Regulation D General Solicitation Ban

The SEC has proposed regulations eliminating the prohibition on general solicitation in offerings conducted under Rule 506 of Regulation D so long as all of the purchasers are accredited investors. The proposal implements Section 201 of the Jumpstart Our Business Startups (JOBS) Act, which removes the restriction on general solicitation for private offerings in an effort to assist companies on attracting investors and raising capital. The SEC proposes to require issuers that use general solicitation to take reasonable steps to verify that all of the purchasers are accredited investors.  The vote was 4-1, with Commissioner Aquilar in dissent.

Whether the steps taken to verify accredited investor status are reasonable would be an objective determination, based on the particular facts and circumstances of each offering and investor. SEC Chair Mary Schapiro hopes that the Commission will receive comment on this aspect of the proposal most particularly, as it is clear from the JOBS Act that taking reasonable steps to verify accredited investor status is part and parcel of permitting general solicitation. The comments received will enable the SEC to have the benefit of the views expressed by issuers, investors and other market participants on the proposal before the rules are finalized.

In presenting the draft to the Commission, SEC staff explained the importance of providing flexibility to accommodate different types of issuers and different kinds of accredited investors. The SEC is not proposing a specific verification method at this time. The draft explains factors to consider when conducting a reasonable verification of a purchaser’s status as an accredited investor, including the nature of the purchaser and the type of accredited investor the purchaser claims to be, the information the issuer has about the accredited investor, and the nature of the offering. These are interconnected factors to help the issuer assess the likelihood that the purchaser is an accredited investor.

The draft thus gives issuers flexibility and, depending on the circumstances, the ability to adapt to changing market conditions. Similarly, the draft does not recommend a non-exclusive list of steps that would satisfy the verification requirement, since that would eliminate the flexibility of the new rules.

The draft clarifies that the reasonable belief standard remains unchanged by the JOBS Act. The draft also clarifies that the use of a general solicitation in a Regulation D private offering would not affect the Regulation S safe harbor for offshore offerings. The draft also indicates that the SEC should monitor the use of general solicitation in private offerings. In aid of this, the draft proposes amending Form D to add a separate checkbox to indicate if the issuer is using general solicitation as provided by the new rule.

Commissioner Elisse Walter, while voting for the proposal, said that allowing general solicitation is a profound change and that there are likely to be unintended consequences.  Thus, she said the SEC must study the changes once the new regulations are implemented. Meredith Cross, Director of the Division of Corporation Finance, said that the staff plans to form a multi-divisional task force to develop strategies to identify general solicitations in private offerings and what steps issuers are taking to verify accredited investor status.

The vote to propose the regulations occurred against the backdrop of a letter to Chairman Schapiro from Rep. Patrick McHenry (R-NC), Chair of the TARP and Financial Services Subcommittee, noting that the SEC’s decision to propose a rule eliminating the Regulation D ban on general solicitation as directed by Section 201 of the JOBS Act, rather than adopt an interim final rule, means that the Commission is unlikely to finalize the rule until next year. By ``kicking the can down the road,’’ noted Chairman McHenry, the SEC is abdicating its responsibility under the law and ignoring the will of Congress and the President. Chairman McHenry has set a hearing for September 13 to examine the SEC’s implementation of the JOBS Act, including the failure to implement Section 201 by the Act’s statutory deadline and by the deadline committed to in earlier congressional testimony.