Ban on General Solicitation Lifted with Respect to Accredited Investors

Today, the Securities and Exchange Commission (SEC) adopted new rules to lift the ban on general solicitation of funds or general advertising for certain private offerings of securities.  Once the rules become effective (60 days after publication in the Federal Register), provided that certain requirements are met, startups, fund managers and other companies will be able to utilize general advertising to offer to sell stock to “accredited investors” as defined in Rule 501 of Regulation D of the Securities Act of 1933 (typically wealthy individuals with liquid net worth in excess of $1 million or investment funds; see our discussion of the recently revised accredited investor standards here as well as information on the SEC’s site 

The rules also impose new requirements on the issuing company to take steps to verify that the purchasers of such securities qualify as accredited investors.  Here are links to the SEC’s press release and Fact Sheet concerning the new general solicitation rules.  The final rules on general solicitation can be found here.  I will be posting a more detailed analysis of the new rules in the next couple of days. 


“Bad Actor” Disqualification


As we have described before, companies wanting to sell stock must either register the securities offering with the SEC or rely on an exemption from the registration requirements.  Rule 506 of Regulation D of the Securities Act of 1933 is the exemption relied upon by many private companies raising capital.  Today, the SEC also adopted rules that disqualify an issuer from selling securities in Rule 506 offerings if the issuer, its board members, and some officers, among others covered by the rule, have experienced a “disqualifying event.”  This is similar to existing “bad actor” rules, such as in the context of offerings exempt under Rule 505 of Regulation D.


Among other things, disqualifying events include criminal convictions in connection with sales of securities, making false filings with the SEC, final orders from federal banking agencies or state regulators prohibiting the issuer from engaging in the sale of securities, as well as certain SEC disciplinary orders and cease-and-desist orders.  If the issuer or one of the other covered persons is deemed a “bad actor” under this rule, the Rule 506 exemption will not be available to the company.  As a result, entrepreneurs and investors may want to be even more careful when recruiting executives and directors to join the company.  (See the SEC’s Fact Sheet regarding the “bad actor” disqualification and our prior discussion here.)  The final rules regarding the bad actor disqualification can be found here. 


Additional Proposed Requirements


At the same time it issued the new rules lifting the ban on general solicitation or advertising, and the “bad actor” disqualification rules, the SEC published proposed rules that would impose additional safeguards/procedures on certain private securities offerings, including requiring an advance filing to be made with the SEC 15 days prior to beginning general solicitation of funds as well as a requirement that issuers provide the SEC with additional details about their offerings.  These proposed rules will be open to public comments for 60 days.  The SEC also issued this Fact Sheet concerning the proposed rules. 


Contrary to what has been reported in a number of news outlets, the proposed rules concerning the 15 day advance filing, and the additional information that would be required to be filed with the SEC by issuers if the proposed rules were to be enacted, are not going into effect at the same time the ban on general solicitation is lifted.  Instead, the SEC has proposed these rule changes and the proposal is now subject to a 60-day public comment period.  Following this comment period, the SEC may issue final rules but the time frame for such issuance is not certain.


The proposed rules regarding additional filing requirements and other safeguards in connection with offerings conducted using general solicitation or advertising can be found here.  Those interested in providing the SEC with comments concerning the proposed rules may do so on the SEC’s web site here.