JOBS Act Relaxes General Solicitation Restrictions for Regulation D, Rule 506 Offerings
By John W. Cones
JOBS Act (HR 3606) Title II – Removing General Solicitation Prohibition from Certain Reg. D, Rule 506 Offerings
SEC must promulgate rules
General solicitation and advertising restrictions do not apply to offerings conducted pursuant to Rule 506 under Regulation D, provided that the issuer takes reasonable steps to verify that each ultimate purchaser is an accredited investor.
As most independent film producers now know, on April 5, 2012, President Obama signed into law the so-called Jumpstart Our Business Startups (JOBS) Act (H.R. 3606). The new law combines several pieces of stand-alone legislation and refers to each section as a Title.
Title I relaxes certain offering, disclosure and compliance requirements for a
class of companies categorized as emerging growth companies (EGCs) and institutes certain reforms relating to the initial public offering (IPO) process.
Title II requires the SEC to promulgate rules providing that general solicitation restrictions do not apply to offerings conducted pursuant to the SEC’s Regulation D, Rule 506 under certain circumstances. The Title II provisions are the subject of this article.
To continue, however, with a brief statement of the subjects addressed in the remaining sections of the new law, Title III creates a new exemption under the Securities Act for investment-based “crowdfunding.” Those provisions are discussed in my two earlier articles (“The New Crowdfunding Law As Applied to Filmmaker Issuers” and “Funding Portal Requirements Under the New Crowdfunding Law”) both of which were also previously posted here at BaselineIntel.com in their “ResearchWrapBlog”).
Title IV provides a new exemption from the registration requirements of the Securities Act of 1933 modeled on Regulation A, which is being referred to as “Regulation A+”. This new exemption increases the permitted size of Regulation A offerings to $50 million of unrestricted securities within a 12-month period to investors, who need not be accredited, subject to the annual filing of audited financial statements and other conditions to be prescribed by the SEC, including periodic reporting requirements.
Titles V and VI of the JOBS Act raise the shareholder thresholds under Section 12(g) of the Exchange Act before a private company is required to register as a public reporting company.
So, back to Title II – the removal of the general solicitation restrictions for Regulation D, Rule 506 offerings. This provision of the new law requires the SEC to promulgate rules within 90 days, providing that the general solicitation and advertising restrictions do not apply to offerings conducted pursuant to Rule 506 under Regulation D, provided that the issuer takes reasonable steps to verify that each ultimate purchaser is an accredited investor. The SEC will presumably provide guidance with respect to what steps are reasonable in its forthcoming rules.
The SEC’s Regulation D sets forth 8 different categories or individuals or entities that are considered “accredited”. Two of those apply to natural persons:
(5) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 (exclusive of the primary residence of such person) and
(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
Title II of the JOBS Act also requires that the SEC amend Rule 144A to provide that securities may be offered by means of general solicitation or general advertising, including to persons other than qualified institutional buyers (QIBs), so long as the issuer reasonably believes that each ultimate purchaser is a QIB.
The SEC’s Rule 144 sets out the requirements relating to the re-sale of restricted securities, such as securities originally purchased pursuant to a Regulation D, Rule 506 offering. Those specific requirements are discussed in my article “Re-Selling Units of a Private Film Offering” (also posted at BaselineIntel.com in their “ResearchWrapBlog”).
The term qualified institutional buyer refers to institutions that manage at least $100 million in securities including banks, savings and loans institutions, insurance companies, investment companies, employee benefit plans, or an entity owned entirely by qualified investors. Also included are registered broker-dealers owning and investing, on a discretionary basis, $10 million in securities of non-affiliates.
As a consequence, in future Regulation D, Rule 506 transactions, the issuers of securities and/or their financial advisors would need to obtain detailed representations and warranties from potential investors regarding their accredited investor or QIB status. Without benefit of the SEC rules relating to this issue, it is presumed that such action on the part of the issuer will be sufficient to verify the status of each ultimate purchaser in the transaction. Thus, it is very likely that certain modifications will have to be made to the private placement offering memoranda and subscription documents used in marketing this new form of private placement.
It is important to keep in mind that the legislation did not change current law, since it is not effective until the SEC promulgates its related rules. Thus, until the SEC issues its new rules relating to these Regulation D, Rule 506 private placements, the existing rule mandating that a pre-existing relationship exist between the issuer and its prospective investors is still in effect.
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