JOBS Act Update: SEC Proposes Rule to End Advertising Ban for Stock Offerings

In late August, the Securities and Exchange Commission proposed a new rule that would lift the long-standing ban on advertising private securities offerings.

The rule, the first of a number of planned regulatory changes designed to help small and emerging growth companies raise capital as mandated by the JOBS Act, is open to public comment for 30 days.

For your convenience, a roundup of legal updates on the matter:

SEC Proposes Rules to Remove the Prohibition Against General Solicitation for Certain Private Placements (Skadden, Arps, Slate, Meagher & Flom LLP):

“The SEC, by a margin of 4-1, recently voted to propose rule amendments to implement Section 201 of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). The proposed rules have the potential to alter substantially the private placement market.”
Read on>>

SEC Proposes New Rule to Eliminate Ban on General Solicitation (Lowenstein Sandler PC):

“Under the current law, private placement issuers may not attract investors by means of general solicitation or general advertising including, without limitation, communications in newspapers, television or radio broadcasts and website publications. Advocates of lifting the ban believe that the current restrictions prevent many small businesses from gaining access to sufficient sources of capital, while critics argue that the restrictions provide important investor protections and prevent fraud.” Read on>>

A Compilation of Enforcement and Non-Enforcement Actions – August 2012 (Foley & Lardner LLP):

“The easing of the restrictions under Rule 506 is intended for offerings that are sold exclusively to ‘accredited investors’ as that term is defined under Rule 501 of Regulation D. With respect to Rule 144A offerings, purchasers may only be ‘qualified institutional buyers’ (QIBs) but offers could be made, under the proposed regulations, to virtually any person.” Read on>>

Solicitation Emancipation: Proposed Rules Relating to the Relaxation of the Prohibition on General Solicitation (Morrison & Foerster LLP):

“The SEC proposal provides for a flexible approach to investor verification. During the open meeting, the SEC Staff noted that the Staff had rejected a prescriptive approach to investor verification. The approach reflected in the proposed rules acknowledges that ‘reasonable efforts’ to verify investor status may differ depending on the facts and circumstances. To that end, the Staff provides a non-exhaustive list of factors that may be appropriate to consider…” Read on>>

SEC Proposes Rules To Eliminate Prohibition on General Solicitation and Advertising (Ballard Spahr LLP):

“The key factor in satisfying the conditions necessary to engage in a general solicitation is the requirement that the issuer take reasonable steps to verify that the purchaser is accredited. Offerees need not be accredited investors, which is why an issuer can advertise its offering in a broad medium such as a newspaper advertisement. The focus, when an issuer engages in a general solicitation, is on whether the purchasers are accredited.” Read on>>

Proposed Rule on General Advertising and Solicitation in Rule 506 Offerings (Leonard, Street and Deinard):

“An ‘accredited investor’ is an investor that falls into 1 of 8 categories set forth in Rule 501(a), including a bank, a private business development company under the Investment Advisers Act of 1940, a tax exempt organization with at least $5 million in assets, and certain natural persons who have a net worth of at least $1 million, or who had an annual income of at least $200,000 individually, or at least $300,000 together with a spouse, in each of the last two years.” Read on>>

General Solicitation for Startups (Davis Wright Tremaine LLP):

“The SEC should be applauded. They maintained the integrity of existing Rule 506. They didn’t propose rules that would have made Rule 506 substantially more difficult to use. The proposed rules, if adopted after the comment process is completed, will go a long way toward opening up additional capital sources for startups.” Read on>>

How Will SEC and FINRA Advertising Rules Apply to General Solicitations and Advertising Under Rule 506? (Dechert LLP):

“It remains to be seen whether in future rulemakings the SEC will propose new advertising rules or amendments to existing rules or issue further interpretive guidance containing specific standards for marketing materials used in connection with general solicitations for private offerings under Rule 506.” Read on>>

SEC Proposes Rules For Solicitation & Advertising of Securities (Cox Smith):

“The proposed rules would also permit securities sold pursuant to Rule 144A to be offered to persons other than qualified institutional buyers (‘QIBs’), including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on the seller’s behalf reasonably believe is a QIB.” Read on>>

SEC Proposes Rules to Implement JOBS Act Provision Regarding General Solicitation and Advertising in Securities Offerings (Wilson Sonsini Goodrich & Rosati):

“Regulation S under the Securities Act provides a safe harbor for offers and sales of securities outside the United States and includes an issuer safe harbor and a resale safe harbor. Two general conditions apply to both safe harbors: (1) the securities must be sold in an offshore transaction and (2) there can be no directed selling efforts in the United States.” Read on>>

SEC Proposes Rule Amendments To Permit General Solicitation in Private Offerings by Companies and Private Investment Funds (Proskauer Rose LLP):

“Many issuers engage in private offerings under Regulation D and/or Rule 144A simultaneously with offshore offerings under Regulation S. The SEC confirmed that such general solicitation will not amount to ‘directed selling efforts’ if conducted in conformity with amended Rules 506(c) and/or 144A.” Read on>>

SEC Proposes Rule to Eliminate Prohibition on General Solicitation and Advertising in Rule 506 Private Offerings (Ober|Kaler):

“In addition, also in accordance with the JOBS Act the SEC proposed an amendment to Rule 144A under the Securities Act, which exempts certain resales of restricted securities to qualified institutional buyers. The proposed amendment to Rule 144A would eliminate the restriction limiting offers to qualified institutional buyers, thereby permitting offers to persons who do not so qualify, including pursuant to general solicitation or general advertising, as long as the securities are sold only to persons the seller and any person acting on the seller’s behalf ‘reasonably believe’ are qualified institutional buyers.” Read on>>

SEC Proposes New Regulations Under JOBS Act Related to Solicitation and Advertising (Saul Ewing LLP):

“The more information that an issuer has about a purchaser would be a significant factor in determining what additional information would be reasonable to verify the purchaser’s accredited investor status. If an issuer has actual knowledge that the purchaser is an accredited investor, the issuer would not have to take any steps at all to verify this status.” Read on>>

At Long Last, A Divided SEC Publishes Proposals To Enable General Solicitation And Advertising For Regulation D And Rule 144A, But Further Delays Effectiveness (Sheppard Mullin Richter & Hampton LLP):

“Public statements issued by each of the five Commissioners on August 29, 2012 indicate significant disagreement amongst them on the fundamental question of whether the Congressional mandate in Section 201 of the JOBS Act should be applied narrowly as written, or whether the SEC should also implement an array of investor protections along with the regulations required by Section 201.” Read on>>

SEC Proposes Rules Eliminating Prohibition Against General Solicitation and General Advertising in Certain Private Placements (Pillsbury Winthrop Shaw Pittman LLP):

“The SEC also confirmed that privately offered funds such as hedge funds, venture funds and private equity funds, would be able to utilize general solicitation and general advertising to raise capital under Rule 506(c) without running afoul of restrictions under the Investment Company Act of 1940.” Read on>>

SEC Proposes to Eliminate the Prohibition Against General Solicitations in Certain Private Offerings (White & Case LLP):

“A private offering document should no longer have to be confidential (although many issuers may still want to treat it as confidential for competitive or other reasons). This means that issuers should be able to send private offering documents to investors without first verifying their status as an AI (because verification would only be required at the time of sale). Issuers should also be able to distribute the offering document more widely, including by email without concern about whether a potential investor forwards the email to others.” Read on>>

SEC Proposes to Permit General Solicitation in Private Offerings (Morgan Lewis):

“The use of general solicitation in Rule 506 or Rule 144A offerings raises a question regarding the continued ability to conduct those offerings concurrently with Regulation S offerings. Specifically, the question focuses on whether it remains possible to satisfy the Regulation S requirements that (1) securities sold without Securities Act registration must be sold in an offshore transaction and (2) there can be no directed selling efforts in the United States. In particular, commentators raised concerns regarding the impact of general solicitation on the ‘no directed selling efforts’ requirement.” Read on>>

The SEC Proposes Rules to Remove Prohibitions on General Solicitation and General Advertising in Certain Regulation D Offerings (Ropes & Gray LLP):

“In connection with proposed Rule 506(c), the SEC also proposed a revision to Form D to add a new check box in Item 6 for issuers to indicate whether they are relying on the exemption in Rule 506(c). The SEC proposed this revision to Form D to allow it to monitor the use of the Rule 506(c) exemption, including the verification methods used by issuers relying on this exemption.” Read on>>

SEC Releases Proposed Regs for Rule 506 Advertising (The California Securities Attorneys):

“Finally, the proposed regulations make clear that issuers may still use the traditional Rule 506 exemption instead. That will appeal to companies that do not need public advertising and prefer having the option of including non-accredited but sophisticated investors.” Read on>>

The SEC Proposed Rule 506(c) To Permit General Solicitation (Christine McKillip):

“Although the ‘reasonable steps’ standard provides flexibility, it lacks clarity, which will make it more difficult to structure offerings. Creating a grey standard also gives the SEC flexibility to bring enforcement action in situations where the Commission believes proper steps have not been taken.” Read on>>

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