As anticipated in our previous blogs, the SEC yesterday proposed rules to permit general solicitation and general advertising in Rule 506 and Rule 144A offerings. The release proposes to create a new Rule 506(c), in which the prohibition against general solicitation would not apply to offers and sales of securities, provided that:
- The issuer takes reasonable steps to verify that the purchasers are accredited investors;
- All purchasers of the securities are accredited investors, either because they come within one of the enumerated categories or the issuer reasonably believes that they do, at the time of the sale of the securities; and
- All terms and conditions of Rule 501 (definitions), Rule 502(a) (integration) and Rule 502(d) (limitations on resale) are satisfied.
Effectively, the SEC has proposed a new exemption that would permit sales of restricted securities to accredited investors, without any manner of sale limitations or specified information requirements.
The main issue in the proposal is what issuers must do to “take reasonable steps to verify” that purchasers are accredited investors. The model the SEC has proposed would neither mandate specific verification steps nor assure issuers and investors that adequate steps have been taken. The model will likely require issuers to obtain reliable third party information most of the time, rather than relying on questionnaires, contractual representations, or similar confirmations from a purchaser.