Author: Jessica A. Benford
On July 10, 2013, the Securities and Exchange Commission ("SEC") issued proposed rules regarding amendments to Regulation D, Form D and Rule 156 of the Securities Act. The SEC has requested comments on the proposed rules.
In order to implement Section 201(a)(1) of the Jumpstart Our Business Startups Act (the "JOBS Act"), the SEC will add paragraph (c) to Rule 506 to permit the use of general solicitation and general advertising. Thus, a 506(c) offering refers to a private offering that utilizes some form of general solicitation. Under the SEC rules, general solicitation is allowed so long as all purchasers are accredited investors and the issuer takes reasonable steps to verify that all purchasers are accredited investors.
Advance Form D. The SEC's proposed rules require the filing of a Form D in Rule 506(c) offerings before the issuer conducts an offering using general solicitation. The Form D must be filed no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering. This advance Form D filing only requires selected Items from Form D. Thus, an issuer filing an advance Form D will also need to file an amendment with the additional Form D Items within 15 calendar days after the date of the first sale of securities in the offering.
Closing Form D. The proposed rules also require the filing of a closing amendment to Form D in all Rule 506 offerings. The closing Form D amendment must be filed within 30 calendar days after the termination of a Rule 506 offering.
Legends. The proposed amendments to Regulation D mandate legends and disclosures on the written general solicitation materials. Proposed new Rule 509 prescribes the new legends. The following prominent legends must be included in ALL written general solicitation materials:
Submission of Written General Solicitation Materials. Issuers will also be required to file the written general solicitation materials used in Rule 506(c) offerings. Proposed new Rule 510T requires issuers, on a temporary basis for two years from the effective date, to submit to the SEC any written general solicitation materials used in a 506(c) offering, not later than the date of the first use of the materials. These materials would NOT be available to the general public and would not be "filed" through the SEC's EDGAR system.
Disqualification. The proposed amendments will disqualify any issuer from relying on Rule 506 for one year for future offerings, if the issuer, or any predecessor or affiliate, did not comply with the Form D filing requirements in the last five years in a Rule 506 offering. This disqualification would only apply to future offerings, is subject to a cure period and a waiver provision, and will not apply until the proposed amendments become effective. The proposed rules include a cure period of 30 calendar days for the failure to timely file any Form D or Form D amendment. The cure period would only be available for the issuer's first failure to timely file for a particular offering. Issuers would also be able to apply for a waiver from the SEC.
The SEC also proposes that an issuer would be disqualified from relying on Rule 506 for future offerings if the issuer, or any predecessor or affiliate, has been subject to any order, judgment or court decree enjoining the person for failure to comply with proposed Rule 510T.
The SEC further proposes that any issuer would be disqualified from relying on Rule 506 for future offerings if the issuer, or any predecessor or affiliate, has been subject to any order, judgment or court decree enjoining the person for failure to comply with proposed Rule 509.
The SEC also proposes that any issuer would be disqualified from relying on Regulation D if the issuer, or any predecessor or affiliate, has been subject to any order, judgment or decree of any court of competent jurisdiction temporarily, preliminary or permanently enjoining the person for failure to comply with Rule 503 (primary requirements of Regulation D).
Form D is the notice of a private offering filed with the SEC through the EDGAR system. The proposed amendments add more required information to Form D for Rule 506 offerings and for Rule 506(c) offerings. Here are some of the proposed changes to Form D:
For offerings under
Rule 506 only
Sales Literature of Private Funds. The proposed amendments extend Rule 156 to apply to ALL private funds. Under the proposed rules, Rule 156 interpretations of the antifraud provisions of the federal securities laws will apply to the sales literature of private funds.
Legend. Because Rule 506(c) will allow private funds (hedge funds, venture capital funds and private equity funds) to engage in general solicitation without loosing exclusions from the Investment Company Act, an additional legend would be required. Under the proposed rules, private funds must include a legend on any written general solicitation materials disclosing that the securities being offered are not subject to the protections of the Investment Company Act of 1940.
Additional Disclosures for Performance Data. Under new Rule 509(c), private funds that include performance data in any written general solicitation materials will be required to include additional disclosures. The legend on the materials must disclose:
The private fund must also include a telephone number or website where an investor can obtain current performance data. The SEC also proposes that performance data that does not reflect the deduction of fees and expenses in any written general solicitation materials must indicate that performance may be lower than presented.
What You Need To Know
The SEC's proposed rules are part of a comprehensive approach to gather more information about Rule 506(c) offerings to allow the SEC to balance the goals of investor protection and capital formation. The proposed rules will increase the costs and time required to prepare Form Ds in connection with Rule 506 offerings.
Some lawmakers have suggested that the proposed rules may be inconsistent with the JOBS Act. Thus, the SEC may consider changes during the comment period. The comment period was reopened until November 4, 2013.
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This Securities Law Update was prepared by Jessica Benford. The information set forth above is for general information purposes and does not constitute legal advice and does not establish any attorney-client relationship. If you have any questions or would like to obtain additional information about SEC regulatory developments, please contact James Brophy (firstname.lastname@example.org), Howard Glicksman (email@example.com) or Jessica Benford (firstname.lastname@example.org).