General solicitation under Rule 506: hold that tweet!By http://profile.typepad.com/1237764140s22740 // July 6, 2012 in Accredited Investor Definition, General Solicitation, JOBS Act, Reg D
By the letter of the law under Title II of the JOBS Act, SEC rules were to have been in place by this week, to implement the lifting of the ban on general solicitation in Rule 506 offerings, where all purchasers are accredited investors.
SEC Chair Mary Schapiro has stated that the deadline will be missed, and that a timeline for the required rulemaking would be announced soon. (I've been looking for that timeline on the SEC website, but don't see it; if you've seen it, let us know in the comments?)
So, to use a metaphor drawn from soccer, we're in to extra time. And at least a couple state securities administrators are taking the opportunity to weigh in with comments, prior to the publishing of proposed rules.
There are some very interesting proposals in a comment letter dated July 3 from the Commissioner of the Ohio Division of Securities, Andrea Seidt.
Drawing a clear line between the existing 506 ("exempt private offerings") and the new, advertising-is-allowed, all-accredited 506 ("exempt public offerings"), Ms. Seidt urges the SEC to use rulemaking to establish that the newer, alternative 506 should:
- permit "only limited information in advertising or solicitations, similar to a tombstone," or impose other "content standards" for advertising;
- require the issuer to "file all proposed general advertising and general solicitation material as an exhibit to the Form D," in advance of "the issuer's first use of any general advertising or solicitation" (current 506 calls for filing the Form D within fifteen days after first sale - the Ohio administrator is in effect asking that there be a pre-filing requirement for the "exempt public offering" 506); and
- require the issuer "to deliver a disclosure document to all investors, regardless of accredited investor status."
There are some "knee jerk" asks in Ms. Seidt's letter that I take to be pro forma for any state securities administrator (e.g., a request to raise the accredited investor thresholds for inflation), but the requests bulleted above are new and specific to the implementation of changes to 506 under the JOBS Act.
Ms. Seidt is grappling in good faith with the conundrums raised from intentionally exposing the general public to an offering in which the general public is not allowed to buy. But I think the right response is to go where Congress suggested in the JOBS Act: where general solicitation is used and thus there is a higher likelihood that non-accredited investors may be motivated to lie to try to get into a deal that has been hyped, make sure there is a heightened standard of verification of the purchaser's accredited status.
However good the intentions of the Ohio Division of Securities, in most ways Ms. Seidt's letter misses the point of the reforms of Title II of the JOBS Act.
"The pre-advertising filing requirement for an exempt public offering" that Ms. Seidt proposes "would," she reasons, "allow the Commission and/or states to review the Form D to confirm that the Commission’s content standards for advertising are met." In such a regime, informal communications - tweets sent out spontaneously or as replies to queries - would not be okay.
No question an issuer and its counsel will need to think through whether and how solicitations should be inventoried and might be made available to all purchasers, whenever the issuer avails itself of the "new" 506. Ms. Seidt notes that "many issuers and practitioners already prepare a disclosure document in connection with traditional exempt private offerings even in the absence of any such requirement," and I think that should and will continue to be the case where the situation calls for one; though the "PPM" format for "new" 506 offerings may look a bit different.
Photo: brutalSoCal / Flickr.