25 November, 2012

 

Legal News & Analysis – Asia Pacific – Hong Kong – Regulatory & Compliance

 

On 27 March 2012, the US Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which, among other things, relaxes the general solicitation and general advertising prohibition under Rule 506 of the Securities Act of 1933. On 29 August 2012, the SEC proposed rule changes that would eliminate the prohibition against general solicitation and general advertising in certain Rule 506 offerings. The parallel provisions of Rule 144A would also be amended.

 

By way of background, Section 4(a)(2) of the 1933 Act exempts transactions from the registration requirement under Section 5 of the 1933 Act by an issuer that is not involved in any public offering. Rule 506 of Regulation D under the 1933 Act is a non-exclusive safe harbor whereby an issuer that meets the Rule 506 conditions will be deemed to fall under the Section 4(a)(2) exemption. Under Rule 506, an issuer generally may offer and sell securities to an unlimited number of US persons who are "accredited investors," so long as the issuer does not use any form of general solicitation or general advertising in the US.

 

Proposed Rule 506(c) would eliminate the condition that no general solicitation or general advertising be used in a Rule 506(c) offering, so long as the securities sold thereunder were only sold to accredited investors (or persons who the issuer has reason to believe are accredited investors). Further, issuers would be required to "take reasonable steps to verify" that the purchasers are accredited investors. The proposed rule would implement a flexible standard for these "reasonable steps" that depends on the particular facts and circumstances of each offering. In the proposing release, the SEC indicated that some factors to consider in determining what reasonable steps would be are the nature of the purchaser and the type of accredited investor that the purchaser claims to be, the amount and type of information that the issuer has about the purchaser, and the nature of the offering (e.g., solicitation, terms and minimum investment). Note that the SEC has stated that exclusive reliance on subscriber responses in a fund application form would not be adequate verification.

 

In the proposing release, the SEC made it clear that the removal of the general solicitation and general advertising prohibition would apply to private funds that rely on the Section 3(c)(1) or 3(c)(7) exemptions under the Investment Company Act for sales to US persons. In addition, with respect to concurrent US offerings (relying on 4(a)(2) and/or Regulation D) and non-US offerings (relying on Regulation S, which exempts offshore transactions where no directed selling efforts take place in the US), the SEC stated that Regulation S offerings will continue to not be integrated with domestic offerings. Thus, the use of general solicitation or general advertisement in the US under Rule 506(c) will not count as "directed selling efforts" that could otherwise disqualify the concurrent sale of securities outside of the US in reliance on Regulations

 

If implemented as proposed, the amendment to Rules 506 could substantially broaden the range of securities for which there is publicly available information. Hedge funds and other private funds would be able to market fund interests on websites, in print ads and on television, so long as the interests were only sold to US persons reasonably believed to be accredited investors.

 

 

 

For further information, please contact:

 

Ethan Johnson, Deacons

ejohnson@morganlewis.com

 

John O’Brien, Deacons

jobrien@morganlewis.com

Leave a Reply

You must be logged in to post a comment.