Compliance & Regulation
28
For Advisor Use Only
January/February
2014
Advisor Impact: Lifting the Ban on the General Solicitation
of Reg D Offerings
ROB MOLINARI
When this was first announced, I received more than a
few calls from excited advisors. But as a person tasked
with managing risk to Commonwealth and our advisors’
livelihoods, this news created more anxiety than excitement
for me. As updates to Regulation D were promulgated by
the SEC, my anxiety lessened, but there still remained a
feeling that this could potentially put our advisors in
some difficult situations.
Rule 506, Then and Now
Most private placements offered through Commonwealth
have relied upon the Regulation D Rule 506 private
offering exemption.
The original rule.
Rule 506, originally enacted in
1982, permits issuers to offer and sell securities to an
unlimited number of accredited investors and to no
more than 35 nonaccredited investors, with no limit
on the dollar amount of the offering, as long as
all
of
the following standards are met:
•
There is no general solicitation or advertising.
•
Nonaccredited investors have “such knowledge and
experience in financial and business matters that
[they are] capable of evaluating the merits and risks
of the prospective investment.”
•
Issuers provide nonaccredited investors with
disclosure documents that are generally the same
as those used in registered offerings.
•
Issuers comply with the anti-fraud provisions
of federal securities laws.
•
Issuers adhere to specific financial
statement requirements.
•
Purchasers receive restricted shares that cannot be
sold for at least one year without registering them.
The new rule.
Instead of an outright elimination of the
ban on general solicitation in its implementation of the
JOBS Act, the SEC decided to create a new, additional
Rule 506 exemption that allows for general solicitations
while leaving the aforementioned exemption and conditions
intact. The Rule 506 exemption that was enacted in 1982 has
become Rule 506(b), and the new exemption that allows
for general solicitation is Rule 506(c).
Here’s the reason why I am no longer as anxious about
allowing general solicitations. On the surface, it may
seem as if the Rule 506(c) exemption is more relaxed
than Rule 506(b), but in fact Rule 506(c) has introduced
two standards that will likely prove too burdensome for
issuers to choose to comply:
1.
Unlike former Rule 506, which allowed issuers
to accept up to 35 nonaccredited investors,
only
accredited investors may purchase a private
placement security under new Rule 506(c).
2.
Issuers have an affirmative obligation to verify the
accredited investor status of each investor should
they choose to use new Rule 506(c). The SEC has
identified four acceptable “principles-based” verification
methods upon which an issuer may rely, which are:
–
Verifying a natural person’s accredited investor
status on the basis of income by documenting
the review of copies of an IRS form that reports
income (e.g., W-2, 1099, 1040);
–
Verifying a natural person’s accredited investor
status on the basis of net worth by evidencing the
review of one of the following (dated within the
past three months): bank statements, brokerage
statements, tax assessments, or appraisal reports
issued by independent third parties;
The JOBS Act, which was signed into law in April 2012, directed the SEC to issue
rules eliminating the prohibition on the general solicitation and advertising of
private placements that exist under Rule 506 of Regulation D. Final amendments
to Rule 506 were released in July 2013, with an effective date of September 23, 2013.
