general understanding of the federal securities laws is that any purchase or
sale of a security must either be registered under the Securities Act of 1933
(the Securities Act) or qualify for an exemption from registration. One of the
primary exemptions from such requirement is set forth in Section 4(a) (2) of
the Securities Act, which provides that the securities registration
requirements shall not apply to transactions by an issuer not involving any
public offering. Regulation D under the Securities Act, adopted in 1982,
provided a series of non-exclusive safe harbors from registration for limited
offerings: a transaction satisfying the requirements of Rule 506 under Regulation D is a "private placement" deemed not to involve a "public
offering" under Section 4(a) (2) and
therefore exempt from registration.
The JOBS Act rule amendments add a
further category of private placement to Regulation D that qualifies the
transaction for exemption from the
registration requirements: the
"general solicitation offering that does not involve a public offering."
This is the first significant liberalization of the private placement rules
since the adoption of Regulation D in 1982. Prior to the JOBS Act rule
amendments, issuers of securities in private placements under Rule 506 of
Regulation D were required to have a bona fide pre-existing relationship with
all offerees and were prohibited from engaging in a
general solicitation of such persons. Indeed, numerous Securities and Exchange
Commission releases in regards to Regulation D have specifically acknowledged
that public advertising is incompatible with a claim of exemption under Section
4(a) (2). The basis for this condition was that public advertising and general
solicitation would constitute a "public" offering, which would, by
definition, not be exempt under Section 4(a) (2). New Rule 506(c) completely alters this analysis.
Under Rule 506(c), the previous requirements
of having a pre-existing relationship with a prospective investor and the prohibition
on general solicitation are no longer applicable. An offering of securities
by an issuer will comply with Rule
506(c) of Regulation D (and therefore satisfy the exemption set forth in
Section 4(a)(2) of the Securities Act), regardless of whether a general
advertisement or general solicitation is involved, and regardless of whether
the issuer has a pre-existing relationship with a prospective investor, so long
as (i) the issuer takes reasonable steps to verify
that the purchasers of securities in the offering satisfy the criteria for
"accredited investors" and
(ii) all of the ultimate purchasers of the offered securities are
"accredited investors" at the time of sale.
1996, securities offerings under Rule 506 were deemed to be "covered
securities" under federal law, which preempted the states from
substantively regulating such offerings under state securities laws (also known
as "blue sky laws"). (The most a state may require of an issuer is a
notice filing and the payment of a filing fee. States continue to retain
jurisdiction over anti-fraud enforcement and the regulation of intermediaries
such as broker-dealers).
concerns will apply if an issuer initially utilizes Rule 506(c) and
subsequently determines to alter the terms of the offering to comply with a
different provision of Regulation D, such as Rule 506(b) (the "old"
Rule 506) or Rule 505. An issuer that initially pursues a general solicitation
under Rule 506(c) may have
"tainted" its ability to rely on the other provisions of Regulation D
that continue to require a bona fide pre-existing relationship with offerees and that the issuer avoid a general solicitation
or general advertisement. In such a situation, consultation with legal counsel
would be crucial. Prior to utilizing a different exemption under Regulation D
for a private placement of securities, counsel may advise the issuer to wait at
least six months and one day to avoid integration of the two separate
offerings. Alternatively, it may be possible to proceed immediately with the
private placement to investors with which that the issuer had a pre-existing
relationship prior to its general solicitation under Rule 506(c).
<![endif]>In practice, issuers that choose to use general advertising
or general solicitation in Rule
506(c) offerings will do so at the cost of eliminating non-accredited
but financially sophisticated investors from the possible pool of investors
(who might otherwise be able to invest in private placements under other
provisions of Regulation D) and require that issuers take greater precautions
in order to ensure that the purchasers are indeed "accredited investors."
<![endif]>State securities commissioners and regulators will now be
precluded from applying their "blue sky" laws and regulating
offerings of securities that involve general solicitation or general
advertisement, provided that the issuer complies with Rule 506(c) and notice filing and fee payment requirements in the
relevant states. States will continue to be authorized to enforce anti-fraud
rules and regulate financial intermediaries, however.
<![endif]>Issuers of securities in private placements should use an
abundance of caution before proceeding with a general solicitation under Rule 506(c) to ensure that, if the offering does not meet their business
objectives, they will not be able to utilize another exemption under Regulation
D in order to secure the required funding, which may require advance planning
and/or waiting a substantial period of time after the initial offering.
<![endif]>Offshore funds that target the U.S. market (in particular
foreign blocker corporations that act as feeder funds) will also need to file a
U.S. Form D under
Rule 506(c) if they plan to
engage in a private placement using general solicitation or general advertising
in the United States and want to take advantage of the preemption of state
filing requirements (other than the notice filings) offered by the federal rule.
*The above content is intended to provide a general guide to the subject matter. Legal or consultant advice should be sought about your specific circumstances.
by Robert A. Friedel and Paul C. Dunn