SEC Proposes New Rules Regarding General Solicitation and Advertising

September 21, 2012

Louis Taubman, Esquire

Last week the SEC staff offered proposed amendments to Rule 506 of Regulation D that would create new rules regarding the permitted use of general solicitation and advertising in certain private securities offerings . The proposed changes, which were mandated by the JOBS Act that was enacted in April, would allow for the use of general solicitation and advertising in offerings made pursuant to Rule 506, provided that all purchasers of securities are accredited investors as defined in Rule 501(a).

Under current Rule 506, an issuer may sell securities to an unlimited amount of accredited investors and up to 35 non-accredited investors. However, under the current rule 506, Rule 502(c) prohibits the use of general solicitation or advertising in connection with any sale made pursuant to Rule 506. The proposed new rule would exempt offerings made in compliance with new Rule 506(c) from the prohibition against general solicitation and advertising contained in Rule 502(c), provided all of the investors are accredited investors. Issuers will still be able to rely on the older version of Rule 506, which does not permit the use of general solicitation or advertising, allows for sales to up to 35 non-accredited investors and which will now be set forth as Rule 506(b).

Issuers that intend to rely on the new rule, once it is approved and in final form, should be aware of the extensive discussion in the proposal set forth by the SEC staff regarding the need to take reasonable steps to verify that all purchasers are accredited investors, as defined in Rule 501(a). The staff declined to set forth a definitive process for such verification but rather states that the determination would be based on the facts and circumstances of each particular situation. The staff then provides certain examples of verification procedures, such as reference to publicly available information about the purchaser, representations by third parties (e.g. broker-dealers or accountants) with knowledge of the purchaser or the use of documentation (e.g. tax returns) but ultimately the staff states the determination must be made on a case by case basis. The staff does at one point indicate that, in certain circumstances, reliance on a check the box questionnaire would not be sufficient.

Another change that issuers should be aware of is the new proposed change to Form D, which is required to be filed within 15 days after the first sales made in any offering in reliance of Regulation D. Under the proposed new rule, a check box would be inserted into item 6 of Form D that must be checked by issuers offering securities in reliance on the new rule. This will allow the staff of the SEC to better track the use of new Rule 506(c) and its allowance of general solicitation and advertising.

In conclusion, it appears that the SEC staff has taken a fairly straight forward approach to the rule changes required by the JOBS Act. Rather than rewrite Rule 506 in its entirety they have proposed relatively uncomplicated changes in the form of new Rule 506(c). Issuers should, however, proceed with caution when relying on the new rule. In particular, issuers (and broker-dealers as well) should pay particular attention to the procedures they establish in order to determine whether or not they have a reasonable basis to believe that a particular purchaser is accredited and should make sure that they keep accurate records documenting these procedures. The SEC staff has expressed its concern over potential abuse in the use of general solicitation advertising in connection private offerings and it is, therefore, to be expected that use of the new rule will be closely monitored by the staff.

Attorney Advertising Disclaimer

The material has been prepared and is copyrighted by Hunter Taubman Fischer LLC ("HTF"). The material is for informational purposes only and does not constitute legal advice. The material is not guaranteed to be correct, complete, or up to date. Information provided by or cited to third parties does not necessarily reflect the opinions of HTF or any of its attorneys or clients. Your receipt of the information is not intended to create, and receipt does not constitute, a contract for representation by HTF. This information is not intended to substitute for obtaining legal advice from an attorney. No person should act or rely on any information without seeking the advice of an attorney. Please be aware that the sending of an e‐mail message to HTF does not contractually obligate HTF to represent you as your attorney. HTF cannot serve as your counsel in any matter unless you and our firm expressly agree, in writing, that we will serve as your attorney. All potential clients are urged to make their own independent investigation and evaluation of any lawyer being considered. Before you decide to retain us, ask us to send you free written information about our qualifications and experience. HTF does not offer any guarantee of case results. Prior results do not guarantee a similar outcome. If you would like more information, please visit us on