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SEC Adopts New Rules Regarding General Solicitation and Advertising

July 10, 2013

Louis Taubman

Louis Taubman, Arila Zhou

On July 10, 2013, the Securities and Exchange Commission (the “SEC”) adopted new rules to implement a JOBS Act requirement to lift the ban on general solicitation and advertising for certain private securities offerings made pursuant to Rule 506 of Regulation D, provided that all purchasers of securities are accredited investors, as defined in Rule 501(a), and the issuer takes reasonable steps to verify that the investors are accredited investors.

The determination of the reasonableness of the steps taken to verify an accredited investor is an objective assessment by an issuer. An issuer is required to consider the facts and circumstances of each purchaser and the transaction. A non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors, provided in the final rules, include the following:

Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year.

Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status.

Meanwhile, issuers will still be able to rely on the existing version of Rule 506, which allows for sales to up to 35 non-accredited investors without use of general solicitation or general advertising.

Another change that issuers should be aware of is the new change to Form D, which is required to be filed within 15 days after the first sales made in any offering in reliance on Regulation D. Under the new rules, a check box will be inserted into item 6 of Form D that must be checked by issuers offering securities in reliance on the new rule. This will allow the staff of the SEC to better track the use of new Rule 506(c) and its allowance of general solicitation and advertising.

In connection with the new rules regarding lifting the bans on general solicitation and advertising for private offerings pursuant to Rule 506, the SEC offered proposed amendments requiring issuers to provide additional information about these securities offerings to better enable the SEC to monitor the market with that ban now lifted. Under the proposal, issuers that intend to engage in general solicitation as part of a Rule 506 offering would, in addition to the current requirements, be required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering. Also, within 30 days of completing an offering, issuers would be required to update the information contained in the Form D and indicate that the offering has ended.

The SEC also adopted rules that disqualify felons and other bad actors from participating in certain securities offerings as required by the Dodd-Frank Act, under which, an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had certain “disqualifying event” listed in the disqualifying rule.

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