RIA Compliance Blog
On the same day that it released rule amendments allowing some Rule 506 offerings to be sold through public solicitation, the SEC proposed an additional set of rule amendments for those offerings. While the newly adopted rule primarily concerns verification of accredited investor status, the additional proposals relate more to the materials used by issuers to solicit those investors.
Currently, offerings under Regulation D require a Form D to be filed 15 days after the first sale; no prefiling is required. The proposal, however, would require that any offering to be sold using general solicitation would require that Form D be filed with the SEC 15 days prior to any solicitation. The SEC has also proposed a temporary rule, Rule 510T, which would go further and require all solicitation material to be filed with the SEC prior to its first use. Under the proposal, this temporary rule would expire in two years.
In addition, the proposed rule changes would require solicitation materials to include legends informing recipients of certain facts relating to the securities offered, such as the requirement that all investors must be accredited, that regulators have not approved the offering and that the securities have transfer restrictions. The proposal also extends to private funds the Rule 156 requirements currently relating to investment company advertising materials.
It appears that the SEC is very concerned about the effect of allowing general solicitations for what were formerly purely private offerings. In the Release, the SEC notes that a reason for the rule proposal is “in particular, to assist our efforts to assess the use of general solicitation in Rule 506(c) offerings.” The staff has been directed to coordinate, across several SEC divisions, a “506(c) Work Plan” so that the Commission can evaluate
• whether the enhanced verification requirements already adopted are effective;
• evaluate whether more non-accredited investors are purchasing private offerings;
• whether the new general solicitation rules will in fact increase capital formation;
• materials used in general solicitations of investors;
• the types of issuers and investors who are participating in the new public 506 offerings; and
• whether there is evidence of increased fraud in 506 offerings.
In addition, the SEC has directed the staff to cooperate with state regulators by providing information regarding 506(c) offering being conducted and to incorporate these offerings into their broker-dealer and investment adviser examination modules. It is likely that issuers, broker-dealers and investment advisers engaging in these offerings will undergo increased scrutiny by regulators as they assess individual firms’ compliance with the rules, as well the effects of these rule changes on both markets and investors.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules.