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SEC Votes to Lift 80 Year Old Ban on General Solicitation


Update:  The text of the rules are now available:  Lifting the General Solicitation Ban, Disqualification of Bad Actors, Proposed Rules re: Form D and Rule 156.

In a historic and long awaited move this morning, the SEC voted 4-1 to implement regulations under Title II of the JOBS Act to lift the 80 year old ban on general solicitation for securities offerings and bringing the industry into the internet age.

This means that soon issuers (including private funds) will soon be able to generally advertise their securities offerings, so long as all the purchasers are ultimately accredited investors or qualified institutional buyers (under Rule 144).  For example, companies may soon be able to use SeedInvest’s social media tools to push information about their company and their offering to all of their Twitter, LinkedIn and Facebook followers (i.e. asking for money from your friends at scale without awkward phone conversions.)

We are still awaiting publication of the final rules, but the quick takeaways are as follows:

  1. Effective Date: The final rule lifting the general solicitation will be lifted effective in 30 or 60 days (or approximately September 12, 2013) depending on the final rules.   The proposed changes to Form D and Rule 156 discussed below will be subject to a 60 day comment period. [BIG CAVEAT: DO NOT GENERALLY SOLICIT YET!]
  2. The Old Way Remains: As expected, the traditional Rule 506(b) offerings will be unaffected issuers will be free to continue to operate under the current system.
  3. Accredited Investor Verification: Under the new Rule 506(c), issuers will be required to take reasonable steps to verify accredited investor status, which can include checking an investor’s tax returns.  In a big upgrade from the rules proposed last August, the rules will provide a safe harbor for relying on 3rd party verifier services (such as the service SeedInvest provides for its issuers).
  4. Advance Form D Filing: To use 506(c), an issuer will have to file a new Form D, 15 days in ADVANCE of any general solicitation.  It’s unclear whether this will be a public or private filing, though it to be private, which would alleviate some concerns.  There would still be a question of how this may slow down offerings and create an additional hurdle to using 506(c) offerings.  As pointed out by Joe Wallin in today’s live blog, this advance filing requirement could also create a trap for the unwary who generally solicit prior to making the appropriate filings.  There are apparently very harsh penalties for failing to file the advance Form D, including a  bar from using Rule 506 (including 506(b) or 506(c)) for 5 years or 1 year after making the appropriate filing.
  5. Form D Filing Information:  Issuers will have to file certain “solicitation materials” with this advance filing, which will likely at least include the general solicitation materials as well as reducing the ability to decline to answer certain questions in the Form D.  It could also require the filing of the proposed terms of the offering or business plan, which could also create some complications.
  6. Bad Actor Rule Changes.  The SEC slightly narrowed the bad actor rule changes since last August to include covering executive officers (not just officers).  There has been some concern about burdensome diligence requirements imposed on issuers by these rules.
  7. Rule 156 Changes.  There will be changes to Rule 156 regarding investment company sales literature to extend those rules to also cover private funds.  We’ll know more about these proposed changes once the rules are released.

The biggest positive here is the new safe harbor for verifying accredited investor verification, which will allow issuers and portals to rely on.  The biggest unknown is how the new Form D requirements will practically impact how these fundraisings will occur.

It’s clear, however, that we are entering a new and exciting age for startups and small businesses where more great companies will have access to capital from a much larger base of accredited investors.

We’ll provide further updates once the text of the rules are released.

*Thanks to Sara Hanks, Bill Carleton and Doug Ellenoff for their quick reaction and feedback on these rules.


This post was written by James Han on July 10, 2013

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