SEC Final Rule: Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144a Offerings

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Gavel.png FINAL RULE: Approved July 10, 2013
Timeline-Removal of Restrictions on Marketing (JOBS Act), SEC
Proposal Date Final Rule Issue Effective Date
September 5, 2012 July 10, 2013 September 23, 2013

On July 10, 2013, the SEC issued a final rulemaking that eliminate the prohibition against general solicitation and advertising by private funds. The change, mandated by the JOBS Act, is intended to allow such entities the ability to more freely communicate to attract capital. The rule entered the Federal Register on July 24, 2013, and its effective date is September 23, 2013.

Additionally, the commission issued proposed amendments to Regulation D, Form D and Rule 156. These rules are intended to allow the commission to better evaluate marketing practices related to Rule 506 as the general solicitation and advertising restrictions are lifted. The deadline for public comment is September 23, 2013. Comments may be filed HERE.

Finally, the commission issued a final rule that disqualifies felons and other "bad actors" from relying on 506 exemptions.


Among the provisions of the Jumpstart our Business Startups Act ("JOBS Act"), signed in April 2012, is a mandate that the SEC remove the restrictions on general solicitation or general advertising for securities offerings relying on Rule 506 exemptions. The ban on solicitation was designed to protect retail investors from inappropriate risks. <ref>Hedge Funds Cleared to Advertise Under SEC Proposal. Bloomberg Businessweek. Retrieved on August 31, 2012.</ref>

Under previous rules, any entity wishing to raise capital by selling securities must register with the SEC unless the entity qualifies for one of several exemptions to the registration requirement. Private funds such as hedge funds generally rely on the Rule 506 exemption, which specifies that such entities may only market to accredited investors. Other entities use the exemption found in Rule 144a, which governs the resale of securities primarily by larger institutional investors known as qualified institutional buyers (QIBs).

On August 29, 2012, the Securities and Exchange Commission issued its proposed rules on eliminating the advertising and solicitation restrictions. The proposal entered the Federal Register on September 5, 2012. The deadline for public comment was October 5, 2012.

Summary of the Final Rule[edit]

Companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that the issuer "takes reasonable steps to verify that the purchasers of the securities are accredited investors, or that the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities." <ref>Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings. Securities and Exchange Commission. Retrieved on July 10, 2013.</ref> For more information on accredited investors, visit the SEC Final Rule: Net Worth Standard for Accredited Investors page.

For Rule 506:
To determine the "reasonableness" of steps taken to assure that purchasers are indeed accredited investors, an issuer is required to consider the facts and circumstances of each purchaser and the transaction. The final rule includes several methods to determine reasonableness, including:

  • 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.

For Rule 144a
Securities sold pursuant to Rule 144A could be offered to persons other than 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 is a QIB.

Proposed Rule Amending Regulation D, Form D and Rule 156[edit]

The accompanying proposed rule is intended to address concerns raised by investors related to issuers engaging in general solicitation. Specifically, the proposal:

  • Requires issuers to file an advance notice of sale ("Form D") 15 days before and at the conclusion of an offering, and have it available for public viewing;
  • Requires issuers to provide additional information about the issuer and the offering, including:
    • 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.
  • Disqualifies issuers who fail to file Form D;
  • Requires issuers to submit written general solicitation materials to the SEC; and
  • Extends guidance about misleading statements to private funds. Interview with Lance Zinman, Partner, Katten Muchin Rosenman, August 2013[edit]

Lance Zinman is a law partner at Katten Muchin Rosenman and head of the firm’s Chicago financial services practice. He regularly advises hedge funds, commodity pools, commodity trading advisors and proprietary trading firms on compliance and regulatory matters. He sat down with John Lothian News Editor-at-Large Doug Ashburn to discuss the SEC rule on private fund solicitation, released July 10, 2013. In the interview, Zinman cuts through the misinformation and explains the key points of the rules. He also explains how the 506 exemption may not be claimed by anyone with a “disqualifying event” and other limitations. He also highlights a few areas in which the rule is unclear or needs to be harmonized with other regulators such as the CFTC.

According to Zinman, it remains to be seen whether this rule will truly usher in a new wave of marketing on behalf of hedge funds and other private funds.

Related Documents: Federal Register Entries: Final Solicitation Rule; Proposed Amendments to Regulation D, Form D and Rule 156[edit]


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