House Overwhelmingly Approves General Solicitation of Accredited Investors

CONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

Amid the recent flurry of House bills intended to facilitate capital formation, which we’ve discussed here and here, is the Access to Capital for Job Creators Act, H.R. 2940. H.R. 2940 would amend Section 4(2) of the Securities Act of 1933, as amended, to exempt from SEC securities registration:

transactions by an issuer not involving any public offering, whether or not such transactions involve general solicitation or general advertising.

The bill would also require the SEC to amend Rule 506 of Regulation D to:

Permit general solicitation or general advertising in offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors; and
Require the issuer to take “reasonable steps” to verify that purchasers of the securities are accredited investors.

The House of Representatives passed H.R. 2940 by a vote of 413-11.

As we’ve noted previously, the concept of easing the ban on general solicitation has been the topic of Congressional and SEC attention. For decades, the statutory 4(2) exemption for non-public offerings has turned substantially on whether the there has been public advertising or solicitation. The SEC has long taken the position that public advertising of an offering is clearly incompatible with a private offering under Section 4(2) of the Securities Act. Rather than investors coming to the offering from such public advertising solicitations, the non-public offering exemption has been interpreted to require that investors have a pre-existing and substantive relationship with the issuer. H.R. 2940 is driven by a concern that these legal standards have unnecessarily limited the pool of investors from whom small companies can raise funds.

While similar concepts have been vetted previously, the overwhelming House approval of H.R. 2940 may signal momentum for the public solicitation of accredited investors.

William Carleton

Andrew, good post. I esp. like how you remind us that the “pre-existing” relationship meme is tied to the general solicitation prohibition.
Couple aspects of the House bill are interesting to me: (1) the “reasonable steps” verification prescription – isn’t what issuers already do (questionnaires, reps) to verify accreditation enough (will the SEC read an implication that more should be done than is currently done by those claiming a 506 all-accredited exemption)?; and (2) the House declined to simply rewrite 502(c) (legislators were not shy of doing this last year when Dodd-Frank rewrote the accredited investor standard, which took effect when the law was signed, and not after rulemaking).
I’d hope a Senate version of this bill would improve the House bill, perhaps by validating current practices to verify accreditation and certainly by just amending the rule without further delay.
Andrew Ledbetter

Good questions. Regarding the “reasonable steps” to verify accredited investor status, Rule 501(a) already has a “reasonable belief” standard for an issuer to determine that an investor is accredited, which is part of what drives the current use questionnaires and reps & warranties. Since the House bill would give the SEC a new rulemaking directive, perhaps the SEC would prescribe something additional aimed at independently verifying accredited investor status, such as making issuers get tax returns, employment confirmations, account statements, etc. The States in particular have long noted that some con artists tell investors just to say they are accredited. This problem could increase exponentially in opening up private offerings to general solicitation of accredited investors, so perhaps SEC rulemaking would address it. We’ll see what happens…
On Rule 502(c), it might be more complicated to open up the Reg D general solicitation prohibition by statute. For instance, Rule 502(c) is a condition of most Rule 504 offerings, is a condition of all Rule 505 offerings, has special considerations in the Rule 508 insignificant deviations rule, etc. In directing the SEC to parse through this via rulemaking, it seems that the legislation in the meantime would allow issuers to rely on the statutory amendment to Section 4(2), which while not a safe harbor is something.

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House Overwhelmingly Approves General Solicitation of Accredited Investors