New SEC rules on solicitation
On July 10, the SEC adopted rules eliminating the prohibition against general solicitation in securities offerings under Rule 506 of Regulation D under the Securities Act of 1933. These rules, effective Sept. 23, permit businesses to solicit investors through, for example, newspaper advertisements, television and radio broadcasts and unrestricted websites. They should make it easier for small and medium-sized businesses to raise capital.
Businesses selling securities must register the offering or find an exemption from Securities Act registration requirements. Businesses often rely upon the exemption in Section 4(a)(2) of the Securities Act for transactions not involving any public offering. Commonly, businesses conducting private offerings structure those offerings to fall within the Rule 506 safe harbor. Rule 506 offerings are popular and effective because the rule pre-empts state blue-sky regulations and permits businesses to raise unlimited capital from an unlimited number of accredited investors and up to 35 nonaccredited investors.
Among others, accredited investors include individuals (including spouses) with a $1 million net worth and individuals with annual income in excess of $200,000 (or $300,000 with spouse) for the last two years.
Rule 506 has long prohibited general solicitation in connection with securities offerings. New Rule 506(c) removes this prohibition, provided the business takes reasonable steps to verify that all investors are accredited.
What constitutes reasonable steps to verify is a facts-and-circumstances analysis that focuses on the nature of, amount and type of information available about the investor and the offering’s nature and terms.
The SEC included in Rule 506(c) a nonexclusive, nonmandatory list of safe-harbor standards of “reasonable steps to verify” accredited investor status of natural persons, including: (1) obtaining a written representation from the investor that the investor is accredited and reviewing documents such as tax filings, bank statements and credit reports; (2) obtaining a representation from a registered broker-dealer, investment adviser, attorney or CPA that such person has taken reasonable steps to verify the investor’s accredited status; or (3) if the investor purchased securities from a business in a prior Rule 506(b) offering and continues to hold such securities, obtaining a certification of accredited investor status from the investor.
Businesses offering securities without general solicitation may still qualify for the Rule 506(b) safe harbor and continue relying on investor self-certifications as to accredited investor status.