Tuesday, October 29th, 2013

Issuers now may elect to rely on a new exemption from registration, known as Rule 506(c), which eliminates the ban on general solicitation and general advertising. However, in order to be eligible to conduct an offering under new Rule 506(c), all purchasers of securities in the offering must be “accredited investors” (or persons reasonably believed by the issuer to be accredited investors) and the issuer must take reasonable steps to verify that all purchasers are accredited investors. The SEC has adopted a principles-based approach to determining whether the steps taken by a company to verify an investor’s accredited investor status are reasonable, with the adopting release identifying the following factors as relevant to the determination: the type of purchaser, the information known about the purchaser, and the nature and terms of the offering. The SEC supplemented this principles-based framework for identifying reasonable verification measures with certain non-exclusive methods of verifying accredited investor status for natural persons only (and not for entities), including through the review of specified types of information (e.g., tax returns), the verification of a person’s status from certain reliable third parties (e.g., broker-dealers) and a written confirmation of continuing accredited investor status from certain existing investors. Because issuers bear the burden of demonstrating that they have satisfied the Rule 506 exemption, companies and funds desiring to conduct an offering in reliance on new Rule 506(c) need to ensure that they have used a measure for verifying accredited investor status that is reasonable under the principles-based framework.

The SEC’s recent changes to Rule 506 also include a less publicized yet important addition of a “bad actor” disqualification pursuant to the Dodd-Frank Act. The new rule, which appears in new Rule 506(d), disqualifies an offering from utilizing the Rule 506 exemption (whether pursuant to Rule 506(b) or 506(c)) if certain persons related to the issuer have engaged in specific “bad acts,” including certain violations of the federal securities laws or other financial industry rules. Issuers engaging in any Rule 506 offering are well advised to survey the applicable covered persons through the use of a “bad actor” questionnaire. Lastly, companies need to be aware that the SEC has proposed a number of additional amendments to Regulation D to help it monitor the changes and address the potential for abuse, so Rule 506 offerings are expected to undergo significant changes in the months ahead.

Please feel free to contact Wes Brinkley at wbrinkley@maynardcooper.com if you have any questions about securities regulation.