SEC Adopts JOBS Act Lifting Ban on Advertising for Private Placements

On July 10, the SEC adopted the long-awaited final rules to implement sections of the JOBS Act to lift the ban on general advertising and solicitation for certain Regulation D private placement offerings (as well as 144 offerings).  At the same time, the SEC proposed new rules that, if adopted, will require additional regulatory burdens. The rules will take effect 60 days from the date of publication in the Federal Register.

The lifting of the ban on general advertising represents one of the most fundamental shifts to securities regulation in nearly 80 years.  Under the new rules, private companies and entrepreneurs seeking to raise capital will be permitted to market their private placement publicly to accredited investors, via social media, print materials, email, group seminars and other means.  Of course, whether advertising and solicitation will be an effective way to reach accredited investors, is another matter.

Lifting of the Ban for Private Placements–Rule 506(c)

Under the newly adopted Rule 506(c), a private placement issuer is permitted to engage in advertising and solicitation if:

(i) all purchasers are accredited investors (generally $1 million dollar net worth excluding residence or $200,000 net income); and

(ii) the private placement issuer takes “reasonable steps” to verify that investors are accredited.

What are reasonable steps?

Under the rule, “reasonable steps” is not concretely defined. However, the SEC provided a non-exclusive list of ways to verify whether an investor is accredited (among the list, only the first will be acceptable to most private placement issuers):

(i) obtaining written certification from a licensed attorney, CPA or broker/dealer certifying that the professional has reviewed documentation indicating that the investor meets the accreditation standard.

(ii) reviewing recent IRS forms, along with self-certification by the investor.

(iii) reviewing bank and brokerage documents, together with self-certification by the investor.

The idea of the issuer looking through and verifying the tax returns or bank account statements of potential investors is a bit ridiculous, as well as dangerous on many levels.  An independent certification by a licensed professional will likely be the way that accreditation is verified in most cases.

Will Advertising be Effective in Raising Capital?

Many practitioners and commentators have expressed doubt as to whether advertising will be an effective way to reach accredited investors.  The argument is that accredited investors may be somewhat more leery of telemarketing, advertisements and direct mail than would the general populace.  Advertisements directed toward investments may be treated with suspicion.  There is also deep concern that advertising private placements will introduce a new pathway for fraudulent offerings.  Companies and entrepreneurs will need to exercise skill and discretion in promoting their offerings.

Even for issuers that choose not to engage in traditional advertising, this rule may provide an opportunity for a new layer of protection for issuers.  Until now, issuers have had to be ultra-vigilant about their use of websites and social media, avoid group presentations and seminars, and have only been able to speak with potential investors with whom they had a “substantial pre-existing relationship.”  Rule 506(c) may become the standard exemption for private offerings if only for the additional protection afforded.

Proposed Rules Requiring Additional SEC Disclosures

In addition to lifting the ban on advertising and solicitation, the SEC proposed new rules that place additional regulatory burdens on issuers using this rule, especially for those using advertisements in written form.  These changes will not go into effect until finalized, which may take several months or more.  These changes are briefly summarized below:

•  The federal Form D, which is presently required to be filed 15 days after the first sale of securities, would need to be filed 15 days before engaging in general advertising.

•  Written solicitation materials would need to be submitted to the SEC by the first day they are used and would be required to bear specified legends and disclosures.

• • • • Some Cautions

Advertising Must Not Be Misleading. State and federal law against misleading statements or material omissions are unchanged by this rule change.  The standard for what constitutes a “misleading statement” in a securities offering is much stricter than the general standard for misleading advertising.  Even a seemingly innocent mistake in wording could have serious consequences.  A private placement attorney should review all marketing and advertising material.

No Other Offerings Affected. Note that this rule affects only offerings under Rule 506 that are sold exclusively to accredited investors.  No other offerings are affected and the ban against advertising will remain in place.

Effective 60 Days from the Date of Publication.  Remember that although the final rules have been adopted as of July 10, 2013 they will not go into effect until 60 days from the date of publication in the Federal Register.