SEC Eliminates Prohibition on General Solicitation and General Advertising in Private Offerings

At an open meeting on July 10, 2013 the SEC approved changes to certain rules regulating private offerings of securities that permit issuers to use general solicitation and general advertising. Specifically, under the new rules for Rule 506 of Regulation D, the most widely-used exemption from registration, issuers may use general solicitation and general advertising to offer their securities provided that:

  • The issuer takes reasonable steps to verify that the purchasers are accredited investors.
  • All purchasers of the securities fall within one of the categories of persons who are accredited investors or who the issuer reasonably believes are accredited investors at the time of the sale of the securities.

Accredited Investor
Under SEC rules, a person qualifies as an accredited investor if he or she has either:

  • An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence.
  • An individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.
     

Issuer Reasonable Belief
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. The final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors, including:

  • 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.

The rules become effective 60 days after publication in the Federal Register.

For more on the SEC’s elimination of the general solicitation and general advertising ban, revisions to Form D as a result of these rule changes and additional rules proposed by the SEC related to this topic, please refer to KMK's client advisory

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