October 2012 Bar Bulletin
Cutting the Red Tape:
SEC Proposes Rules for Private Placement Offerings
By Kyle Hulten
Title II of the JOBS Act proposes to remove the ban on general solicitation in 506 private placement offerings.1 The idea is to increase the number of potential investors who view private placement offerings, thereby increasing the number of companies that are able to raise funds through equity offerings.
On August 29, the Securities and Exchange Commission published proposed rules for enacting Title II of the JOBS Act.2 Congress left a number of important issues to be addressed in the SEC rulemaking process, including:
(1) whether the current Rule 506 exemption will survive the legislation; (2) what securities issuers need to do to satisfy the requirement that they verify an investor's accredited status; and (3) whether additional safeguards are required, such as regulating the nature of the general solicitation.
The Commission voted to propose the rules by a 4-1 margin. Commissioner Luis Aguilar voted against the proposed rules due to his reservations regarding the lack of provisions protecting vulnerable investors. The SEC is currently soliciting public comments on the proposed rules, which are not expected to be implemented until mid- to late fall at the earliest.3
Title II provides that issuers must take "reasonable steps to verify" that all investors participating in the generally solicited offering are accredited investors, but Congress left it up to the SEC to elaborate what constitutes "reasonable steps." The proposed rules state that the determination of what constitutes "reasonable steps to verify" would be based on the particular facts and circumstances in the offering.
The SEC lists the following as relevant factors: