Securities Regulation and Corporate Governance

On November 13, 2013, the Staff of the SEC’s Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) providing guidance on recent rule amendments lifting the ban on general solicitation in securities offerings made pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933 (Securities Act) and Rule 144A under the Securities Act, as mandated by the Jumpstart Our Business Startups Act (JOBS Act). 

Several of the new interpretations provide helpful insights on the implementation of the new rules:

• The Staff is now on record saying that documentation establishing a potential purchaser’s accredited investor status under one of the specific non-exclusive verification methods listed in the rule (each, a specified method) will “go stale” if the documentation is older than specified under the applicable specified method at the time that the investor makes an investment decision. (Question 260.08)
• The Staff clarified that an issuer must amend its Form D to specify the correct exemption under Regulation D if it initially filed a Form D indicating reliance on one exemption but subsequently decides to rely upon a different exemption. (Questions 260.05, 260.11 and 260.12)
• The Staff clarified that, in a Rule 144A offering, not only the issuer, but also the initial purchasers and the other distribution participants involved in the offering, may engage in general solicitation. (Question 138.03) 

The C&DIs can be found here.  A summary description of the C&DIs is below.

Rule 506

• If an issuer commenced an offering in reliance on Rule 506(b) prior to the effective date of Rule 506(c), and afterwards decides to continue that offering under Rule 506(c) in accordance with the transition guidance in the adopting release, the issuer must file an amendment to the Form D previously filed for the offering (if any) indicating its reliance on Rule 506(c). (Securities Act Rules Question 260.05)
• If an issuer takes reasonable steps to verify the accredited investor status of a purchaser, reasonably believes that the purchaser is an accredited investor at the time of the sale of securities, and otherwise complies with the requirements of Rule 506(c), the issuer will not lose the ability to rely on Rule 506(c) solely because it subsequently becomes known that the purchaser does not meet the criteria for any category of accredited investor. (Securities Act Rules Question 260.06)
• By contrast, an issuer that does not satisfy the accredited investor verification requirement under Rule 506(c) cannot rely on Rule 506(c), even if all of the purchasers in the offering are accredited investors.  The Staff noted, however, that the determination of what constitutes reasonable steps to verify a purchaser’s accredited investor status is an objective determination based on the relevant facts and circumstances of each purchaser and the transaction. (Securities Act Rules Question 260.07)
• Although an issuer may satisfy the verification requirement under Rule 506(c) by using either the principles-based method of verification or by relying upon one of the specified methods, an issuer that chooses to rely on one of the specified methods must meet its specific requirements.  For instance, if documentation demonstrating an investor’s net worth is more than three months old at the time the purchaser decides to purchase securities in an offering, the issuer cannot use this documentation to rely on the net worth specified method.  However, the issuer may instead determine whether it has taken reasonable steps under the principles-based method. (Securities Act Rules Question 260.08)
• An issuer may satisfy the specified method for third-party verification by obtaining written confirmations from an attorney or CPA who is licensed or duly registered in good standing in a foreign jurisdiction, not only an attorney or CPA licensed or registered in the U.S. (Securities Act Rules Question 260.09)
• The specified method whereby an existing investor who purchased securities as an accredited investor in an issuer’s Rule 506(b) offering prior to September 23, 2013, and who continues to hold such securities, will be deemed to be an accredited investor in a subsequent Rule 506(c) offering by the same issuer, cannot be extended to that investor’s purchase of securities of a different issuer that has the same sponsor as the original issuer, such as a new limited partnership with a general partner that sponsored a prior limited partnership. (Securities Act Rules Question 260.10)
• An issuer that commenced an offering intending to rely on Rule 506(c) that ultimately does not engage in general solicitation may subsequently determine to rely on Rule 506(b) for the offering, as long as the conditions of Rule 506(b) have been satisfied with respect to all sales of securities that have occurred in the offering.  The issuer would also have to amend any previously filed Form D, indicating its reliance on Rule 506(b) rather than Rule 506(c). (Securities Act Rules Question 260.11)
• Similarly, an issuer that commenced an offering in reliance on Rule 506(b) may determine, prior to any sales of securities in the offering, to rely instead on Rule 506(c), as long as the conditions of Rule 506(c) are satisfied with respect to all sales of securities in the offering.  The issuer must also amend any previously filed Form D to indicate the change. (Securities Act Rules Question 260.12)
• An issuer that fails to meet the conditions of Rule 506(c) in a purported Rule 506(c) offering cannot instead rely on Securities Act Section 4(a)(2) if the issuer engaged in general solicitation, as the JOBS Act mandate to permit general solicitation in certain Rule 506 offerings affected Rule 506 only, not Section 4(a)(2) offerings generally. (Securities Act Rules Question 260.13)

Rule 144A

• In a Rule 144A offering in which securities were initially sold to financial intermediaries in transactions exempt pursuant to Section 4(a)(2) or Regulation S, any or all of the issuer, the initial purchasers, and the other distribution participants involved in the transaction may engage in general solicitation. (Securities Act Rules Question 138.03)
• The amendments to Rule 144A permitting the use of general solicitation did not change the analysis of “directed selling efforts” within the meaning of Regulation S in concurrent Rule 144A and Regulation S offerings. (Securities Act Rules Question 138.04)