SEC Removes Ban on General Solicitation


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A summary on the new SEC rule removing the ban on general solicitation effective September 23, 2013.

Published in: Economy & Finance, Business
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SEC Removes Ban on General Solicitation

  1. 1. By C. Craig Lilly
  2. 2.  Private issuers soon will be able to publicly discuss and advertise investment opportunities (and publicize past performance, which previously had been prohibited).  Issuers still may only sell such securities to accredited investors (or “AIs”). 1
  3. 3.  Issuers do not need to solicit – issuers can rely on existing rule (SEC Rule 506(b)).  Issuers can no longer rely on AI “checking the box”: issuers will generally need to rely on “third party confirmation” or obtain tax returns, bank statements, etc. to verify AI status.  Issuers must file Form D 15 days before first solicitation with promotional materials.  Failure to file could result in ban of securities issuances for 1 year plus.  Rule is effective September 23, 2013! 2
  4. 4.  For issuers that generally solicit, they would be required to take “reasonable steps” to verify investor accreditation.  Issuer can no longer rely on investors checking the box that they are an AI.  For individuals, accreditation requires net worth in excess of $1 million and/or annual income in excess of $200,000 ($300,000 for married couples).  For institutions like charitable organizations or family trust, the asset threshold is $5 million. 3
  5. 5.  Income Test: review federal tax returns for two most recent years with representation that person has reasonable expectation to have income level in current year.  Net Worth Test: review bank statements, brokerage statements, etc. plus credit report showing liabilities.  Third Party Confirmation: written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify AI status.  High Investment Amount: If the offering terms require a high minimum investment amount such that only an AI could meet (e.g. $5M), it may be reasonable to rely on direct cash investment (provided not debt financed). 4
  6. 6.  Issuer must confirm that it has taken “reasonable steps” to verify AI status.  It is likely that wealth management providers, registered investment advisers, registered broker dealers and CPAs will provide written confirmation  Their review of AI status must be within three months of confirmation.  It is likely that standardized confirmation forms will develop. 5
  7. 7.  All written solicitation materials must be filed with the SEC before their use.  Must include certain legends 6
  8. 8.  The securities may be sold only to “accredited investors,” which for natural persons are investors who meet certain minimum annual income or net worth thresholds.  The securities are being offered in reliance on an exemption from the registration requirements that apply to registration under the Securities Act.  The SEC has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials.  The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities.  Investing in securities involves risk, and investors should be able to bear the loss of their investment. 7
  9. 9.  Issuers utilizing general solicitation would be required to file a Form D with the SEC: a) at least 15 days prior to the beginning of general solicitation, b) Within 15 days of first sale, and c) file an amended Form D within 30 days after the offering is terminated.  Failure to do so could cause the SEC to ban issuers from subsequent securities issuance for a year or more. 8
  10. 10. Three Potential SEC Filings 9 15 calendar days before general solicitation/ advertising Within 15 calendar days after first sale Within 30 calendar days of termination/completion of offering File Advance Form D File Amended Form D File amended “closing” Form D*Sale *The filing of the closing Form D is not required if all required information has already been included in an earlier Form D filing and the issuer checked the correct closing box.
  11. 11. Existing Rule 506(b) Existing SEC Safe Harbor New Rule 506(c) New SEC Safe Harbor Marketing General solicitation prohibited. General solicitation allowed. Offerees Unlimited number of AIs; no more than 35 non- AIs. Anyone can be offeree. No limitations. Purchaser Types AI; no more than 35 non- AIs.¹ AIs only. Verification Reasonable belief that the purchasers are AIs; non – AIs must meet sophistication requirements.¹ Issuer has made “reasonable steps” to verify that the purchasers are AIs. Reasonable belief that the purchasers are AIs. Consequences of Loss of Safe Harbor Issuer may be able to rely on §4(a)(2) exemption for offering “not involving any public offering.” Registration violation. 10 ¹ Each non - AI must meet Rule 506(b) sophistication requirements.
  12. 12.  This allows SEC to collect data on how general solicitation is being used. 11
  13. 13.  Issuer is disqualified from relying on Rule506 for one year if the issuer (or any predecessor/affiliate) does not comply with all Form D filing requirements for the last five years.  Disqualification applies to issuer and its directors, executive officers, participating officers, controlling entities, affiliated funds, 20% beneficial owners, underwriters and placement agents, etc. if they (a) have been convicted of, or (b) are subject to sanction for securities fraud, other violations of specified laws. 12
  14. 14. Events relating to a covered person that will disqualify an offering from relying upon Rule 506 include:  Certain felony and misdemeanor convictions involving the purchase or sale of a security, the making of a false filing with the SEC, as well as certain court injunctions and restraining orders.  Certain final orders from the CFTC, state securities commissions, state and federal banking regulators, state insurance commissions or the National Credit Union Administration that bar a person from regulated activities.  Certain SEC disciplinary orders suspending or revoking the person’s SEC registration or limiting the person’s activities. 13
  15. 15.  Certain SEC cease-and-desist orders.  Certain suspensions or expulsions from membership in, or suspensions or bars from association with a securities self- regulatory organization/member.  Having filed (as a registrant or issuer), or being named an underwriter in, a registration statement that was or is the subject of certain SEC orders, investigations or proceedings.  United States Postal Service false representation orders, preliminary injunctions, restraining orders relating to conduct alleged to constitute a scheme for obtaining money through the mail by false representations. 14
  16. 16.  Winners – early stage companies and small to mid-size funds seeking to attracting HNW investors.  Others – advisors to foregoing including lawyers, accountants and consultants and broker-dealers; possibly later stage venture investors.  Losers – existing online portals for funding which will have new competitors (mixed results). 15
  17. 17.  Issuers do not need to solicit – issuers can rely on existing rule.  The burden of proof has shifted on AI status – issuers will need to rely on “third party confirmation” or obtain tax returns, bank statements to verify AI status.  Issuers must file Form D 15 days before first solicitation with promotional materials.  Failure to file could result in 1 year or more ban from securities issuances.  Date effective is September 23, 2013! 16
  18. 18. This presentation has been prepared for general informational purposes only. It does not constitute legal advice, and is presented without any representation or warranty whatsoever as to the accuracy or completeness of the information. No one should, or is entitled to, rely in any manner on any of this information. Parties seeking advice should consult with legal counsel familiar with their particular circumstances. 17
  19. 19. C. Craig Lilly