NY Metro Hedgefund Law & News

SEC Proposes Advance Filing of Form D and Additional Requirements for Rule 506 General Solicitations

New Rule Proposal

On July 10, 2013 the SEC approved a proposal intended to enhance its ability to assess developments in the private placement market now that the final (see foregoing article in this blog)  to lift the ban on general solicitation has been adopted. In particular, the proposal is intended to improve the SEC's ability to evaluate the development of market practices in Rule 506 offerings and to address  concerns raised by investors related to issuers engaging in general solicitation.

The proposal requires issuers to file an advance notice of sale 15 days before and at the conclusion of an offering…

Currently, an issuer - such as a company or a fund - selling securities using Rule 506 is required to file a Form D no later than 15 calendar days after the first sale of securities in an offering. That form is a type of notice that provides information about the issuer and the securities offering.

Under the proposal, issuers that intend to engage in general solicitation as part of a Rule 506 offering would, in addition to the current requirements, be required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering. Also, within 30 days of completing an offering, issuers would be required to update the information contained in the Form D and indicate that the offering has ended.

The proposal requires issuers to provide additional information about the issuer and the offering…

Currently, Form D requires identifying information about the company or the fund selling the securities, any related persons, the exemption the issuer is relying on to conduct the offering, and certain other factual information about the issuer and the offering.

Under the proposal, issuers are required to provide additional information to enable the SEC to gather more information on the changes to the Rule 506 market that could occur now that the general solicitation ban has been lifted.

The additional information would include:

• Identification of the issuer's website.
• Expanded information on the issuer.
• The offered securities.
• The types of investors in the offering.
• The use of proceeds from the offering.
• Information on the types of general solicitation used.
• The methods used to verify the accredited investor status of investors.

The proposal disqualifies issuers who fail to file Form D…

Under the proposal, an issuer is disqualified from using the Rule 506 exemption in any new offering if the issuer or its affiliates did not comply with the Form D filing requirements in a Rule 506 offering. As proposed, the disqualification would continue for one year beginning after the required Form D filings are made. Issuers would be able to rely on a cure period for a late Form D filing and, in certain circumstances, could request a waiver from the staff.

The proposal requires issuers to include legends and disclosures in written general solicitation materials…

Under the proposal, issuers are required to include certain legends or cautionary statements in any written general solicitation materials used in a Rule 506 offering.

The legends would be intended to inform potential investors that the offering is limited to accredited investors and that certain potential risks may be associated with such offerings.

In addition, if the issuer is a private fund  and includes information about past performance in its written general solicitation materials, it would be required to provide additional information in the materials to highlight the limitations on the usefulness of this type of information. The issuer also would need to highlight the difficulty of comparing this information with past performance information of other funds.

The proposal also requests public comment on whether other manner and content restrictions should apply to written general solicitation materials used by private funds.

The proposal requires issuers to submit written general solicitation materials to the SEC…

Under the proposal, issuers are required to submit written general solicitation materials to the Commission through an intake page on the SEC website. Materials submitted in this manner would not be available to the general public. As proposed, this requirement would be temporary, expiring after two years.

The proposal extends guidance about misleading statements to private funds…

Currently, an SEC rule provides guidance on when information in sales literature by an investment company registered with the SEC could be fraudulent or misleading for purposes of the federal securities laws.

Under the proposal, this guidance - contained in Rule 156 under the Securities Act - would be extended to the sales literature of private funds. It would apply to all private funds whether or not they are engaged in general solicitation activities. In the proposing release, the SEC would express its view that private funds should now begin considering the principles underlying Rule 156.

What's Next

The proposal is now subject to a 60-day public comment period.

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Robert Kiggins, Esq. of McCarthy Fingar LLP, is editor of the blog, and may be reached at (914) 385-1024 or rkiggins@mccarthyfingar.com.

Nothing is this blog is intended to be or may be relied upon as specific legal advice. Securities and related laws are complex and facts are different from case to case. Competent counsel should be consulted. Views expressed by the author in this article are his own and not those of any other person.

SEC Allows General Solicitation of Investors in Reg D Rule 506 Offerings

Rule 506

The final Rule (click on "Rule" for full text of the SEC Release on the final rule) approved by the SEC  this week makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

• The issuer takes reasonable steps to verify that the investors are accredited investors.
• All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

Under existing Rule 501, 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.

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. Nevertheless, in response to commenters' requests, the final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors.

The methods described in the final rule include the following:

• 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 existing provisions of Rule 506 as a separate exemption are not affected by the final rule. Issuers conducting Rule 506 offerings without the use of general solicitation or general advertising can continue to conduct securities offerings in the same manner and aren't subject to the new verification rule.

Rule 144A

Under the final rule, securities sold pursuant to Rule 144A can be offered to persons other than Qualified Institution 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 behalf of the seller reasonably believe to be QIBs.

Form D

The final rule amends Form D, which is the notice that issuers must file with the SEC when they sell securities under Regulation D. The revised form adds a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation or general advertising.

No Effect on Exclusions from the 1940 U.S. Investment Company Act Registration

Private funds typically rely on either the so-called Section 3(c)(1) 100 or fewer investors or the Section 3(c)(7) all "qualifed purchasers" exemption from being required to register as investment companies under the 1940 U.S. Investment Company Act. However, there is also a requrement under each of the exemptions that the fund is not making and does not propose to make a "public offering" of its securities. Fortunately the law enabling the final rule made it clear that Rule 506 offerings will not be deemed "public offerings" under the Federal securities laws as a result of general advertising or general solicitation. The SEC reaffirmed this law in its Release discussing the final rule.

What's Next

The rule amendments become effective 60 days after publication in the Federal Register. It remains to be seen how the industry will implement the new rules.

 

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Robert Kiggins, Esq. of McCarthy Fingar LLP, is editor of the blog, and may be reached at (914) 385-1024 or rkiggins@mccarthyfingar.com.

Nothing is this blog is intended to be or may be relied upon as specific legal advice. Securities and related laws are complex and facts are different from case to case. Competent counsel should be consulted. Views expressed by the author in this article are his own and not those of any other person.