We, like others, are anxiously awaiting the JOBS Act rule making which will permit general solicitation in Rule 506 offerings. We believe however, there may be some bumps in the road, and have set forth some thoughts below as to what those might be.
Seemingly forgotten while hoards of people get ready to start posting adds selling securities on the internet is Section 926 of the Dodd-Frank Act. Section 926 of the Dodd-Frank Act directs the SEC to issue rules which would prevent the use of Regulation D Rule 506 offerings by certain “bad actors.” The Dodd-Frank Act directs the SEC to adopt rules similar to the current disqualifiers in Regulation A. The SEC rules must also prohibit Rule 506 offerings by persons subject to final orders which bar them from association with entities regulated by certain authorities, such as state securities commissions, or that have been convicted of any felony or misdemeanor in connection with the purchase or sale of any security. We have discussed some of the problems with Section 926 here.
The SEC has previously proposed rules under Section 926 of the Dodd-Frank Act and according to their rulemaking schedule the SEC intends to adopt them by the end of June. It seems likely the SEC will put these rules on the front burner so they can claim they have helped to combat fraud in connection with general solicitations. For an example of how problematic the Section 926 rules could be, read the ABA comment letter.
Section 201 of the JOBS Act requires issuers to take “reasonable steps to verify that purchasers of securities are accredited investors.” However, an issuer would violate securities law by an inadvertent sale to one non-accredited investor even if the issuer took such reasonable steps under a literal reading of the JOBS Act. Hopefully, this will be fixed in the rulemaking. Otherwise, a general solicitation could be a fairly risky proposition.
Rule 506 offerings and Regulation S offerings are often conducted in tandem. One of the requirements of Regulation S is that there be no “directed selling efforts” in the US, which includes advertisements. In addition, in Regulation S offerings, no attempt is made to verify that purchasers are accredited investors, and in our experience asking for such a representation would be problematic because of the US-based focus of the definition. Hopefully, this can be fixed in the rulemaking process.
And if the SEC wants to make a general solicitation difficult, they can. For instance, they could require all solicitation material be attached to Form D filed with the SEC. Let’s hope they don’t go there.
Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.