SEC Adopts Rules implementing [some] provisions of the JOBS Act of 2012
If you're planning to finance your film, play, musical or other project by seeking investors, things may have just gotten a little bit easier for you. A few days ago, on July 10th, the Securities Exchange Commission finally took a long-awaited step toward implementing key provisions of the JOBS Act of 2012 that will allow issuers of securities under Rule 506 to cast a wider net in seeking investors. The regulations were supposed to have been out long before now, but discord and disorganization at the SEC got in the way.
Lifting the ban on General Solicitation
The new provision can be found at Rule 506(c) of Regulation. It allows general solicitation and general advertising in Rule 506 securities offerings, provided that all purchasers of the securities are accredited investors and the issuer reasonably believes, and takes reasonable steps to verify, that such purchasers are accredited investors.
What this means, put simply, is that if you're financing a film, play, or musical, and you're seeking investors, you can advertise the opportunity to the public at large, provided you only sell units to persons who qualify as “accredited investors” (For more about what that means, see my previous post.)
The commission also adopted a rule prohibiting certain “bad actors” from availing themselves of the exemption provided by Rule 506.
Similarly, new Rule 144A(d)(1) clears the way for the offering of securities to persons other than qualified institutional buyers (“QIBs”) in Rule 144A offerings, including by means of general solicitation, provided that the securities are sold only to persons that the seller reasonably believes are QIBs.
New filing and reporting requirements
The SEC also voted to propose amendments that aim to improve the SEC’s ability to monitor developments in the Rule 506 market and to address concerns about fraud.
The rule changes would:
- Require issuers to file a Form D at least 15 calendar days before engaging in general solicitation in a Rule 506(c) offering and to file a final amendment to that Form D not later than 30 calendar days after completion of the offering;
- Prohibit an issuer from using the Rule 506 exemption for one year if the issuer, or any predecessor or affiliate of the issuer, failed to comply, within the last five years, with Form D filing requirements;
- For a temporary two-year period, require issuers engaging in general solicitation under Rule 506(c) to (confidentially) submit their solicitation materials to the SEC;
- Require additional information in Form D filings regarding the issuer and its website, the type of securities offered, the purchasers involved in the offering, the use of proceeds from the offering, the types of solicitation methods used, and the accredited investor verification methods used;
- Require issuers to provide legends on solicitation materials that explain that the offering is limited to accredited investors and disclose the risks involved; and
- Expand Rule 156 of the Securities Act to provide guidance for private funds about when information in sales literature could be fraudulent or misleading. Rule 156 currently provides investment companies with such guidance.
Don't jump into this yet. This is the first step, but it's not law yet. Everything takes effect 60 days after being published in the Federal Register. Stand by.
The Commission has yet to issue rules to implement the much-anticipated crowdfunding components of the JOBS Act.
Conclusion
This is a highly technical area and requires great care to ensure that everything is done correctly. If you're planning to raise financing for a project, contact us for a consultation.
Up until earlier this week, it was illegal to promote sales of securities through so-called “general solicitation” if relying on the private offering exemptions of Regulation D. Then, last year, President Obama signed the JOBS Act into law, and the SEC has finally issued the regulations to implement the act. Among the provisions that have now gone into effect, is the new Rule 506(c), which permits a seller of securities to use general solicitation (such as advertising in print or on the internet), to find buyers. The new rule is rather restricted, so it's important to know the rules.
Background