Latest on JOBS Act: SEC Proposed Rules to Permit General Solicitation in Private Offerings – What This Means for Your Business
One of the most difficult aspects of raising capital via a Private Placement / Private Offering is finding potential investors – let alone convincing potential investors to actually invest in your offering. The main culprit of this difficulty is the prohibition on using general solicitation to get the word out about your Private Placement. No advertising. No standing on stage shouting out top a bunch of strangers that you are raising capital. Nope – you basically need to have a pre-existing relationship – and that narrows your choices big time.
The JOBS Act FINALLY looks to be close to changing all that.
Section 201(a) of the JOBS Act requires the SEC to remove the prohibition on general solicitation and general advertising in offerings done pursuant to Rules 506 and 144A, so long as all purchasers of the securities are “accredited investors.” Also, it requires you to take reasonable steps to verify that purchasers are accredited investors, using procedures developed by the SEC.
On August 29, 2012, the SEC proposed several amendments to Rules 506 and 144A to implement these requirements. Highlighted below are the important proposed changes the SEC made, three ways it would benefit you when seeking to raise capital for your business, and two key concerns you should be aware of.
Proposed Rule 506(c) would permit general solicitation and general advertising. However, if you generally solicit or advertise under this new rule, you would essentially have to: (1) take “reasonable steps” to verify that all of the purchasers are accredited investors; and (2) check a box on Form D indicating that you are acting pursuant to Rules 501, 502(a), and 502(d), which allow for general solicitation.
No specific method is required for verifying a purchaser’s accredited status. Rather than creating specific safe-harbor steps, the SEC has stated that the steps that you take would be required to be reasonable under the “particular facts and circumstances of each purchaser.” The SEC included a non-exclusive list of factors that you would consider when taking reasonable steps to verify, including: (1) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (2) the amount and type of information that is available to you about the purchaser; and (3) the nature and terms of the offering, including the manner in which investors were solicited, and the terms of the investment, such as the minimum investment amount.
There was been some criticism that the “reasonable steps” standard may raise privacy concerns for accredited investors if issuers must seek personal financial information as a "reasonable step." The SEC attempted to address this criticism in its release by stating that the greater the personal relationship the potential investor and the issuer have, the lesser the level of investigation required to meet the "reasonable steps" standard. The SEC has pointed out that information for use in verifying accredited investor status is available from various public and third party sources are available for certain information that could be used to substantiate a claim of accreditation. The SEC has also suggested that receiving a letter from an attorney, a broker-dealer, or an accountant of the investor may be enough for an issuer to rely on the investor’s claim that he is accredited.
You needn’t comply with the new rules. If you were to comply with the existing 506 and 144A rules—and you do not generally solicit or advertise—you would not be subjected to the amended rules. There would be no additional verification requirements.
Be sure to keep records. Regardless of the particular steps taken, it would be important for you to maintain adequate records that document the steps taken to verify that a purchaser is an accredited investor.
Key Benefits of Proposed Rules
Broader access to investment capital. If you are starting a business, the SEC’s proposed rules are good for you in that they would offer broader access to investment capital. The ability to solicit and advertise your Private Placement / Private Offering to a larger pool of investors would make it easier for you to raise capital for your business.
2 Key Concerns
1. The SEC provided no specific steps to verify a purchaser’s accredited status. The SEC did not provide sufficient guidance as to what “reasonable steps” you should take to verify that a potential investor is an accredited investor. It only provides that the steps you take be reasonable under the “particular facts and circumstances of each purchaser.” No clear, bright-line rule is provided to protect you. An important benefit of the JOBS Act is that it allows you to know with reasonable certainty that your offering is exempt from registration under the Securities Act. If your receiving of the exemption is dependent on individual facts and circumstances, it takes away a lot of certainty. If the SEC does not provide more guidance, you should be very cautious and obtain as much information from qualifying investors as you can—including a letter from their attorney, accountant, or broker confirming their investor status.
2. There is inadequate investor protection. The proposed rules to the JOBS Act do nothing to guarantee that investors are adequately protected in private offerings. Commissioner Aguilar was the lone vote against the SEC’s proposal for this reason. It would allow some fiscally shrewd opportunists to promote ambiguous, high-risk transactions to the public to get some quick cash.
Request for Public Comment
The SEC urges the public to submit comments in regards to its proposed rules. The SEC’s proposal and request for comment are available at http://www.sec.gov/rules/proposed/2012/33-9354.pdf. Comments are due by October 5, 2012.
It will be interesting to see the SEC’s final adoption of these rules. Be sure to check back for an update when it does so.
As always, you should be sure to consult experienced securities attorney before you engage in a private placement / private offering of securities.