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.