JOBS Act: SEC Must Amend Reg D to Permit Advertising for Private Offerings to Accredited Investors
The Jumpstart Our Business Startups Act (JOBS Act) has made several important changes to federal securities laws. One of these changes has been to require the SEC to eliminate the restriction under Regulation D prohibiting general solicitation and advertising in connection with certain private offerings.
Regulation D (Rules 501 et seq.) is the safe harbor regulation adopted by the SEC 30 years ago for private offerings under Section 4(2) of the Securities Act of 1933. One of the principal components of Reg D (as well as its predecessor regulations and case law) is that by its very nature a “private” offering should not involve any advertising. While even the casual observer could understand this restriction prohibited television, newspaper and radio ads and cold calls, in fact, the SEC's interpretation of this restriction covered a lot more activity. In essence, the SEC believed that for the no-solicitation or advertising condition to be met, each purchaser in an offering must have a pre-existing business or personal relationship with the issuer or one of its officers or directors, or the issuer's placement agent.
This broad interpretation called into question the practices of a number of issuers. For example, it would not be uncommon for one potential investor in an offering to refer the issuer to other investors. Since these other investors did not have a pre-existing business or personal relationship with the issuer, sales to these investors might have resulted in a general solicitation and failure to meet the conditions of Reg D. The same result would occur if an issuer purchased a list of “accredited investors.”
The JOBS Act requires that not later than July 4, 2012, the SEC must revise Reg D to eliminate the prohibition on general solicitation and advertising for offerings under Rule 506 provided that all purchasers of the securities are accredited investors. The statute provides that that the issuer must take reasonable steps to assure that the purchasers are accredited investors, using methods determined by the SEC.
This revision will eliminate some of these common pitfalls for issuers in private offerings. Further, companies will be able to advertise their offerings and speak with friends of friends. The only limitation is that they will be required to sell only to accredited investors (Rule 506 permits sales to non-accredited investors provided the issuer delivers to each non-accredited investor disclosure documents, including, in many cases, audited financial statements).
We expect that once Reg D is revised, many issuers will advertise their offerings on websites, through e-mail blasts, and perhaps even through print or other media.
ABOUT THE AUTHOR: Alan B. Spatz
Mr. Spatz practices primarily in the areas of corporate and securities laws. He has represented corporations and other entities in a wide variety of industries and businesses, including high technology, computer, medical, entertainment, natural resources, financial institutions, mortgage banking, specialty finance and consumer products.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.