JOBS Act Loosens Restrictions on Rule 506 Offerings

“The JOBS Act removes the prohibition on general solicitation and advertising in offerings made under Rule 506 solely to accredited investors. Recall that Rule 506 is a safe harbor exemption from registration that most startups use to raise capital. Under Rule 506, a startup can solicit accredited investors and there is no limit to the amount of capital that can be raised. But, a big limitation under the current version of Rule 506 is that startups can’t generally solicit or advertise their securities.” (President Obama signed the JOBS Act! Now what? by Davis Wright Tremaine LLP)

One of the key changes the Jumpstart Our Business Startups (JOBS) Act will bring about is the lifting of restrictions on Rule 506 offerings, the type of offering typically used by startups.

Currently, the issuers are prohibited under Rule 506 from engaging in general solicitation and advertising of offerings, in exchange for an exemption from SEC registration. But provisions of the JOBS Act remove those restrictions, allowing companies to reach out to investors and potential investors directly.

For your reference, five takeaways from the changes to Rule 506:

1. Public advertising of Rule 506 offerings will be allowed:

“The JOBS Act amends Rule 506 to allow general solicitation or advertising if all purchasers qualify as “accredited investors” under SEC rules. By eliminating any restrictions on who the securities may be offered to, issuers may now announce that they are seeking funding to anyone, including through a website or email, without worrying about losing the exemption. This greatly widens the pool of potential investors for private companies, especially those without wealthy friends.” (JOBS Act Passed, Now What? 5 things Mature Companies & Entrepreneurs Need to Think About by Wahab & Medenica LLC)

2. Issuers must take steps to insure that purchasers are accredited investors if they advertise:

“These amendments will allow companies to engage in general solicitation and use general advertisements for private offerings made to accredited investors under Rule 506 and for private offerings made to qualified institutional investors under Rule 144A. However, companies must take reasonable steps to ensure the purchaser is either an accredited investor or qualified institutional buyer.” (JOBS Act Eases Regulatory Burdens on Capital Raising by Armstrong Teasdale LLP)

3. Companies will have to choose between public advertising and non-accredited investors:

“The big change is that public advertising is allowed, although then all investors must be accredited investors – no non-accredited but sophisticated investors are allowed… Companies will have to decide whether public advertising will be worth giving up sophisticated investors who are not accredited. Presumably there will be a large number of companies publicly advertising for accredited investors. That means that some companies may prefer not to advertise publicly and rely instead on personal connections in order to have both accredited and sophisticated investors.” (The JOBS Act and Advertising in Rule 506 Offerings by The California Securities Attorneys)

4. The changes have not yet been implemented:

“The JOBS Act amendments to Rule 506 Offerings will not take effect until implemented by SEC rulemaking, which the statute directs the SEC to adopt within 90 days. However, the SEC staff is currently inundated with implementing regulations regarding the provisions of the JOBS Act that were effective upon its enactment.” (The JOBS Act: What to Expect from the Not-So-Private Private Placement Regulations by Kilpatrick Townsend)

5. The rules are not yet clear:

“It is unclear whether the SEC will permit any flexibility from the literal reading of the statute that all investors must, without exception, be accredited investors. Many believe that the applicable standard for reliance upon the new Rule 506 Offering rule should be that the issuer ‘reasonably believes’ that all investors in the offering are accredited investors, despite the fact that the plain language of the statute does not seem to provide any room for error. Unfortunately, it is not clear that the SEC has the authority to implement this view, even if it were so inclined.”(The JOBS Act: What to Expect from the Not-So-Private Private Placement Regulations by Kilpatrick Townsend)

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