On July 10, 2013, the Securities and Exchange Commission (the “SEC”) adopted rules under Title II of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), which included lifting a ban on general advertising and general solicitation in certain offerings of securities conducted pursuant to Rule 506 of Regulation D. These final rules will become effective on September 23, 2013.

Rule 506(b) currently provides an exemption from the Securities Act registration requirements for issuers selling securities to an unlimited number of accredited investors and to no more than thirty-five non-accredited investors, so long as those non-accredited investors are deemed “sophisticated” and possess “such knowledge and experience in financial business matters that he [or she] is capable of evaluating the merits and risks of the prospective investment.” However, general advertising and general solicitation are prohibited.

The new rules amend Rule 506 by adding paragraph (c), which creates a new exemption permitting general advertising and general solicitation. Certain offerings can now be broadly advertised on television, radio, newspapers and over the internet. In order to qualify for this new exemption, however, all of the purchasers must be accredited investors and issuers must take reasonable steps to verify that purchasers are accredited. Whether the steps taken are “reasonable” is an objective determination made by the issuer in the context of the particular facts and circumstances of each purchaser and transaction. The SEC’s adoption of this principles-based method of verification is intended to provide issuers with flexibility. For issuers seeking greater certainty that they satisfy this verification requirement, Rule 506(c) includes a non-exclusive list of specific verification methods for natural persons. The SEC also separately adopted new rules preventing issuers from relying on Rule 506 when certain felons and other “bad actors” are associated with the issuer.

Issuers that are not interested in general solicitation or desire to avoid the heightened verification requirements for accredited investors can still conduct offerings under the requirements of Rule 506(b).

This recent action by the SEC not only impacts companies currently raising investments through crowdfunding by permitting such companies to promote their investments to a greater audience but also paves the way for the SEC to finalize the rules under Title III of the JOBS Act and the opportunity for participation in crowdfunding by non-accredited investors. It is expected that a proposal and the 90-day comment period for the rules to implement Title III will occur some time this fall.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation.