CHAPTER 4 Private offerings T
itle II of the JOBS Act directs the SEC to eliminate the ban on general solicitation and general advertising for certain offerings under Rule 506 of Regulation D, provided that the
securities are sold only to accredited investors, and under Securities Act Rule 144A offerings, provided that the securities are sold only to persons who the seller (and any person acting on behalf of the seller) reasonably believes is a QIB. Rule 506 of Regulation D is the most popular means for conducting a private offering, because it permits issuers to raise an unlimited amount of money and pre-empts state securities laws. In recognition of concerns about restrictions on communications in private offerings, Title II directs the SEC to revise Rule 506 to provide that the prohibition against general solicitation or general advertising in Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. Under the SEC’s existing definition, an accredited investor is a person who falls within one of the categories specified in the definition, or a person who the issuer reasonably believes falls within one of those categories. The revised rules must further require that issuers using general solicitation or general advertising in connection with Rule 506 offerings take reasonable steps to verify that purchasers of securities are accredited investors, using methods to be determined by the SEC. With respect to Rule 144A, the rule as revised must provide that securities may be offered to persons other than QIBs, including by means of general solicitation or general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a QIB. The JOBS Act specifies that any offering made pursuant to Rule 506 that uses general advertising or general solicitation will not be deemed a public offering. These changes to Rule 506 and Rule 144A would be available to all issuers, not just EGCs, as well as private companies and funds. Until the SEC adopts final rules as directed by Title II
of the JOBS Act, market participants relying on the Rule 506 and Rule 144A safe harbours should continue to
comply with the existing requirements of these exemptions, and will generally continue to implement customary procedures for these offerings until the rules change. Market participants should also continue to satisfy conditions of applicable safe harbours such as Securities Act Rules 135c, 152 and 155, as well as comply with applicable SEC and SEC Staff guidance regarding the integration of concurrent private and public offerings. Title II of the JOBS Act also specifies that persons who
maintain certain online or other platforms to conduct Rule 506 offerings that will use general advertising or general solicitation will not, by virtue of this activity, be required to register as a broker or a dealer pursuant to Exchange Act section 15, provided that enumerated conditions are satisfied. In order to qualify for this exemption, such a platform must not receive transaction- based compensation, take possession of customer funds or securities, or be subject to an Exchange Act statutory disqualification.
Rule 506 of Regulation D Rule 506 of Regulation D is considered a safe harbour for the private offering exemption of section 4(2) (now 4(a)(2)) of the Securities Act. Rule 506 has proven to be an attractive means for conducting private offerings, because an issuer using it can raise an unlimited amount of money. Today, the conditions for using Rule 506 are as follows: • The issuer cannot use general solicitation or advertising to market the securities;
• The issuer may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated: they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
• An issuer must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws,
JOBS Act Quick Start 39
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