Thursday, September 21, 2017

New C&DIs target Regulation D and Rule 147

By Mark S. Nelson, J.D.

The SEC’s Division of Corporation Finance issued a set of new and revised Compliance & Disclosure Interpretations covering various aspects of Regulation D and Securities Act Rule 147. Regulation D had been significantly updated by provisions in the Jumpstart Our Business Startups (JOBS) Act and by the Commission’s implementing rules release. The Commission more recently adopted changes to Rule 147. The new C&DIs include eight substantive revisions or additions plus 22 revisions the Division characterized as non-substantive.

Rule 506. Securities Act Rules Question 257.08 has been updated to reflect the policy choice made by Congress in JOBS Act Section 201 with respect to Rule 506 of Regulation D. The prior version of this C&DI, issued in 2009, provided that an offering would not lose its “covered security” status if a notice of an exempt offering was not filed with the SEC. The staff then opined that such a filing was not a condition of satisfying the Securities Act Section 4(a)(2) exemption with respect to Rule 506. Similarly, the revised C&DI states that the filing of Form D is not a condition that must be met under Rule 506.

When Congress enacted the JOBS Act, Section 201 required the Commission to adopt rules to allow general advertising and general solicitation in a new type of offering, which the Commission provided for in Rule 506(c). Section 201 also included language characterizing Rule 506:
Section 230.506 of title 17, Code of Federal Regulations, as revised pursuant to this section, shall continue to be treated as a regulation issued under section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)).
The JOBS Act separately amended Section 4(2) to add the “(a)” in “4(a)(2),” the current locus of the exemption.

Rule 504. The Division clarified that Rule 504 of Regulation D may not be available to private funds in some circumstances. Revised Securities Act Rules Question 258.03 observed that Rule 504 offerings can be either public or non-public. Public offerings by a private fund would bring the fund within the ambit of the Investment Company Act and, thus, the fund would be unable to invoke Rule 504. Prior Question 258.03 had concluded that Rule 504 was unavailable to investment companies.

The staff also noted the differences between offerings under Rule 504 and Rule 506(c), the latter having been deemed not to be “public offerings” by JOBS Act Section 201(b)(2). Specifically, the JOBS Act provision said Rule 506 offerings would not be public offerings “as a result of general advertising or general solicitation.”

A second change involved the staff withdrawing Question 258.04, which previously dealt with the calculation of the aggregate offering price. But the staff added Question 258.05 regarding whether an instruction in Rule 504 concerning the calculation of the aggregate sales price also would imply that offerings must be integrated. The staff said “No.”

Lastly, the Division’s new Question 258.06 reiterated that Rule 504 would be unavailable to an issuer subject to a bad actor disqualification on or after January 20, 2017. After this date, an issuer must consider its bad actor status any time it relies on Rule 504.

Rule 147. Securities Act Rules Question 541.02 has been withdrawn. That C&DI had concluded that a family trust located in the state where a Rule 147 offering was to occur could not be offered securities or purchase securities where the trust had a non-resident beneficiary that held a 50 percent interest in the trust. However, the staff added Question 541.03, reflecting the Commission’s latest rulemaking in this area, which posits a somewhat similar scenario and concludes that a family trust could be offered securities or purchase securities under Rule 147. Specifically, a Rule 147 offering could take place where a family trust (not a separate legal entity) has two trustees of whom one is a non-resident of the state where the offering takes place.

Rule 505 C&DIs withdrawn. The Division also withdrew C&DIs regarding Rule 505 of Regulation D, which had been contained in Securities Act Rules Questions 259.01 to 259.05. The withdrawal was prompted by changes the Commission made to Rule 504 to raise the aggregate amount of securities that can be offered and sold from $1 million to $5 million, thus eliminating the need for Rule 505, which the Commission has repealed. The Division also withdrew the related Question 659.01 regarding censure of an issuer that was a broker-dealer.