SEC Proposes Revisions of Securities Offerings in Response to JOBS Act

The Jumpstart Our Business Startups Act (JOBS Act), passed on April 5, 2012, endeavored to ease restrictions on businesses seeking capital by amending existing regulations.[1] In accordance with the Jobs Act, the SEC has proposed a set of rules which allow (but does not mandate) the general solicitation in securities offered under Rule 506.[2] The SEC has also proposed rules in relation to 144A offerings.

Rule 506

Rule 506 (a non-exclusive safe harbor) exempts transactions by an issuer “not involving any public offering” from the registration requirements of Section 5 of the Securities Act of 1933.[3] In addition, Rule 506 allows an issuer to offer and sell securities to an unlimited number of “accredited investors” and up to 35 non-accredited investors (provided those investors meet the “sophistication” requirements). Issuers offering securities under Rule 506 were prohibited from “general solicitation” and “general advertising,” including published in newspapers and magazines or broadcasted over television or unrestricted websites.

Section 201 (a)(1) of the JOBS Acts lifts that restriction against general solicitation, provided that the purchaser is an accredited investor and issuer has taken reasonable steps to verify that the purchasers are accredited investors. The purpose of the verification is to reduce the risk of a securities sale to investors who are not accredited. The reasonable steps are not specified; rather, it is an objective determination based on the facts and circumstances of each situation.

Some factors considered in that determination include:

  • The nature of the purchaser. Are they a natural person or an entity? Do they come within any of the eight enumerated categories under Rule 501(a)? Are they registered as an investment company or a broker/dealer?
  • The information the issuer has about the purchaser. This would include both public information, private information a purchaser is willing to disclose.
  • The nature of the offering

The Commission acknowledges the unique characteristics surrounding every offering and thus, refrained from mandating a uniform verification method. Rather, the Commission evaluates all factors together and in the context of the offering. In determining whether the issuer’s steps were reasonable, the “reasonable” standard still applies.

Form D

Form D is a notice filed with the SEC by each issuer claiming a regulation D exemption. A check box has not been added to indicate whether an offering is being conducted pursuant to the proposed amendment to Rule 506.

Rule 144A

Rule 144A involves the resale of securities to Qualified Institutional Buyers (QIB). The SEC has proposed rules allowing sellers to solicit potential investors, as long as the seller, or anybody action on behalf of the seller, reasonably believes is a QIB.

Conclusion

In 2011, the amount of capital raised under Rule 506 and 144A offerings exceeded $1 trillion dollars combined, exceeding the amount of capital raised in registered offerings ($984 billion). These two rules are vital to the flow of capital and small businesses in particular. The proposed rules and amendments should enhance that flow. Moreover, allowing solicitation in these circumstances allows investors to become aware of new investment opportunities they otherwise would have difficulty identifying.

The SEC is seeking public comments on these proposed rules.


[1] Pub. L. No. 112-06, 126 Stat. 306

[2] http://www.sec.gov/rules/proposed/2012/33-9354.pdf

[3] 15 U.S.C. 77d(a)(2)

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