Changes to Rule 506 Will Offer Issuers New Options for Marketing Securities
A Business Law Client Alert
08/01/13
On Wednesday, July 10, 2013, the SEC adopted amendments to Rule 506 of Regulation D under the Securities Act of 1933 implementing changes mandated by the Jumpstart Our Business Startups Act (JOBS Act). Rule 506 is an exemption from registration under the Securities Act of 1933, as amended. Under Rule 506, an issuer may raise an unlimited amount of capital from an unlimited number of “accredited investors.” Historically, this exemption prohibited general solicitation or advertising.
The amendments adds a new section to Rule 506, section (c), which allows an issuer to engage in general solicitation or general advertising in the offering and selling of securities. As a result, issuers may use broad-based marketing methods such as the Internet, social media, email campaigns, television advertising, and seminars open to the general public.
In order to avail itself of the exemption, an issuer must take “reasonable steps” to verify that the purchasers are accredited investors. What steps are reasonable? The SEC indicates that issuers should consider a number of factors in verifying accredited investor status. Among the factors to consider are the nature of the purchaser and type of accredited investor they claim to be; the amount and type of information the issuer has about the purchaser; and the nature of the offering including the manner in which the purchaser was solicited, the terms of the offering, and the minimum investment amount.
The new rule specifies four non-exclusive methods of verifying accredited investor status that, if used, satisfy the verification requirement. These methods relate to:
- An income test through which a person is verified as an accredited investor based on review of income and relevant IRS documents;
- A net worth test in which a natural person is determined to be an accredited investor based on an assessment of his or her assets and liabilities;
- Third party attestation wherein an issuer is deemed to satisfy the verification requirement by obtaining a written confirmation from a registered broker-dealer, SEC registered investment adviser, licensed attorney, or certificated public accountant; and
- The existing accredited investors’ method, in which an investor that was accredited prior to the enactment of Rule 506(c), and remains an investor of the issuer, satisfies the verification requirement.
The SEC also adopted changes to Rule 506, to be codified as Rule 506(d), which prohibit persons with certain securities laws violations (“bad actors”) from participating in Rule 506 offerings, a change required by Dodd-Frank.
These amendments will become effective 60 days after publication in the Federal Register (estimated to be mid to late September 2013).
For questions or concerns regarding this issue, please contact any member of Bodman’s Securities Team listed below.
- Laurence B. Deitch – (313) 392-1055 / ldeitch@bodmanlaw.com
- Fred B. Green – (313) 392-1056 / fgreen@bodmanlaw.com
- Barbara A. Bowman – (313) 393-7598 / bbowman@bodmanlaw.com
- Edwin J. Lukas – (313) 393-7523/ elukas@bodmanlaw.com
- Carrie Leahy – (734) 930-0120 / cleahy@bodmanlaw.com
- Sarah J. Williams – (734) 930-2485 / swilliams@bodmanlaw.com