Public Solicitations on Rule 506 offerings

February 7, 2014


Several Congressmen and an SEC Commissioner have independently urged the SEC to move forward with adopting proposed rules that impose additional requirements on public solicitations of Rule 506 offerings. At the same time that the SEC finalized its initial rulemaking on the subject last September, it proposed additional rules that would require filing Form D prior to any general solicitation and would impose advertising restrictions, among other things. We discussed that action and the proposed rules in two earlier posts.

Rule 506 was adopted as a safe harbor under Section 4(2) of the Securities Act of 1933, which provides that securities sold "by an issuer not involving any public offering" are exempt from registration under the Act. However, under Title II of the JOBS Act, passed in 2012, Congress required the SEC to adopt a rule allowing for the use of public solicitation in those offerings under conditions to be prescribed by the SEC. The initial rule adopted last September - requiring enhanced verification of accredited investor status - was the Commission's first small step on the issue.

The comment period on the simultaneous rule proposal imposing additional requirements expired on November 4, 2013, but the Commission has taken no further action to date. On December 5, 2013, however, SEC Commissioner Luis Aguilar, speaking at a Consumer Federation of America conference, forcefully called upon the rest of the Commission to move forward in adopting the strengthened rules. "Every day that these proposals are not adopted is another day that investors face great harm. I'm frustrated because investors are going to be damaged" said Commissioner Aguilar. "Unfortunately, it's been almost five months since those proposals have been issued for comment."

Adding to the pressure on the Commission, six United States Senators, Carl Levin (D-MI), Martin Heinrich (D-NM), Tom Harkin (D-IA), Jack Reed (D-RI), Mark Pryor (D-AR), Jeff Merkley (D-OR) and Angus King (I-ME), wrote a letter to SEC Chair Mary Jo White voicing their support specifically for quick adoption of the proposed rule requiring Form D to be filed prior to any public solicitation. These senators argued in their letter that it is necessary to require filing of Form D prior to selling securities to enable regulators - especially state securities regulators - to prevent fraud. The senators argued that, "[s]tate securities regulators are the primary regulator of offerings conducted under Rule 506 pursuant to their antifraud authority. ... This front-line regulatory protection is critical, particularly given that the SEC does not actively monitor Rule 506 offerings and is not likely to scrutinize the tide of general solicitations or advertisements that will stem from implementation of Title II of the JOBS Act."

Since NSMIA excluded Rule 506 offerings from effective state overview beginning in 1997, state regulators, citing many examples of fraud, have been urging Congress or the SEC to alter that course. The proposal to require Form D prefilings is seen by the states as an important step in allowing enhanced oversight.

Until the Commission finalizes additional rulemaking, issuers wanting to publicly solicit investors in Rule 506 offerings, assuming compliance with other provisions of the Rule, seemingly are required only to limit those offerings to accredited investors and take "reasonable steps" to verify the accreditation of those investors. If the Commission does adopt the proposed Rule language, there will be additional requirements to be sure, but the world of private offerings will still have added a new, public, element. And, issuers can probably expect to experience serious scrutiny from some state regulators as they use the newly expanded exemption.

Parker MacIntyre, LLC provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.