SEC Proposed Rule: Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144a Offerings
|FINAL RULE: This page refers to the proposed rule on general solicitation. To view the final rule, click here.|
|Proposal Date||Final Rule Issue||Effective Date|
|September 5, 2012||July 10, 2013||September 23, 2013|
On August 29, 2012, the Securities and Exchange Commission issued a proposed rule that would eliminate the prohibition against general solicitation and general advertising in certain securities offerings, specifically those currently falling under Rule 506 and Rule 144a exemptions. The proposed rule changes were mandated by the Jumpstart our Business Startups Act ("JOBS Act"). The rule is intended to allow hedge funds and other private offerings greater flexibility in advertising and marketing.
The proposal entered the Federal Register on September 5, 2012. The deadline for public comment is October 5, 2012.
Under current 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).
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>
The change mandated by the JOBS Act is intended to allow such entities the ability to more freely communicate to attract capital.
Summary of the Rule Proposal
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." <ref>SEC Proposes Rules to Implement JOBS Act Provision About General Solicitation and Advertising in Securities Offerings. Securities and Exchange Commission. Retrieved on August 31, 2012.</ref> To determine the "reasonableness" of steps taken, certain facts must be considered:
For Rule 506:
- The type of 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.
- The nature of the offering, meaning the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering..
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.
Related Document: Proposed Rule as it Appears in the Federal Register