SEC ISSUES NEW GUIDANCE ON GENERAL SOLICITATION AND ADVERTISING IN REGULATION D OFFERINGS

Starting September, 2013, the SEC adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act.  The enactment of new 506 (c) resulting in the elimination of the prohibition against general solicitation and advertising in private offerings to accredited investors has been a slow but sure success.  Multiplication of crowd funding platform is a testimony to such a success and the capital marketplace has taken notice. 

The Rule 506 was renumbered to Rule 506(b) and issuers have the option of completing offerings under either Rule 506(b) or 506(c).  Rule 506(b) allows offers and sales to an unlimited number of accredited investors and up to 35 unaccredited investors, provided however that if any unaccredited investors are included in the offering, certain delineated disclosures, including an audited balance sheet and financial statements, are provided to potential investors.  Rule 506(b) prohibits the use of any general solicitation or advertising in association with the offering.   SEC interpretations and case law have established the principle that where there is a pre-existing, substantive relationship, offers will not be considered a general solicitation.

The new Rule 506(c) requires that all sales be strictly made to accredited investors and adds a burden of verifying such accredited status to the issuing company.  In a 506(c) offering, it is not enough for the investor to check a box confirming that they are accredited.  506(c) offering allows the use of general solicitation and advertising in conjunction with soliciting potential investors.  As it would be practically impossible to control who views an advertisement, there are no restrictions in the rule in that regard; rather, the restrictions are related to verifying accredited status prior to consummating the sale. The burden of the proof is on the Company to demonstrate that the Issuer has done its due diligence on the accredited investors.

On August 2015, the SEC updated its Division of Corporation Finance Compliance and Disclosure Interpretations (C&DI), adding 11 new C&D to provide guidance related to general solicitation and advertising in Regulation D offerings.  It is well established that an issuer may offer and sell securities to persons with whom it, or anyone acting on its behalf, has a pre-existing substantial relationship, without being deemed to have engaged in general solicitation or advertising as defined in Regulation D.  Seven of the new C&DI are on the topic of pre-existing substantial relationships.   

We will summarize the 11 new C&DI in a subsequent analysis. For more details we invite you to refer to www.sec.gov

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