Background and Overview
On July 10th, the SEC adopted a new Final Rule that will open the door to private fund advertising. In addition, the SEC proposed new rules that would enhance the information required to be included in Form D. The JOBS Act—passed in April of 2012—directed the SEC to eliminate the longstanding prohibitions against general solicitation and advertising in private offerings under Rule 506 of Regulation D and Rule 144A.
Final Rule: Lifting Ban on General Solicitation
First, the Final Rule creates Rule 506(c), a new exemption under Regulation D that allows for general solicitation of privately offered securities provided that all purchasers of the securities are accredited investors or reasonably believed to be accredited and that the issuer takes reasonable steps to verify that the purchasers are accredited investors.
The reasonable verification test is objective and can be met by considering several factors; however, the SEC attempted to provide some guidance by adding to the Final Rule a list of non-exhaustive factors that definitively satisfy the verification requirement, such as checking IRS forms or relying on confirmation of third party verification.
Among other provisions, the Final Rule also:
Second, the proposed rule amends Rule 144A to permit resale of securities through the use of general solicitation so long as the securities are sold to a Qualified Institutional Buyer (QIB) or a purchaser the seller reasonably believes is a QIB.
- Confirms private funds that engage in general solicitation pursuant can still qualify for 3(c)(1) and 3(c)(7) exemptions;
- Revises Form D for issuers to disclose they are claiming an exemption under the new rule;
- Retains the current exemption under existing Rule 506(b), which allows funds to sell to a limited number of non accredited investors so long as the funds do not generally solicit.
The Final Rule will become effective in mid-September, 60 days after the date it is published in the Federal Register.
Proposed Rule: Amendments to Form D
The SEC also proposed amendments to Regulation D that would enhance the information required to be included in Form D beyond the revisions referenced above. The proposal would, among other things, require issuers that choose to generally solicit to do the following:
The proposed amendments are subject to a 60-day comment period.
- Include additional information in Form D, such as the methods used to solicit investors and verify accredited investor status;
- File Form D 15 days before the general solicitation begins;
- File an amended Form D within 30 calendar days at the end of an offering;
- Cease use of Rule 506(c) if the issuer fails to comply with Form D requirements;
- Include specific legends in general solicitation materials.
Timing and Considerations
Because the Final Rule does not go into effect until mid-September, it is critical that private funds ensure continued compliance with the current ban on general solicitation. Once the ban on general solicitation is officially lifted, private funds should remain on the lookout for future rules that will likely increase regulation of private fund advertising.