10 Jul SEC Ends Ban on General Solicitation in Private Offerings

The SEC minutes ago in an open hearing finally adopted rules required by the Jumpstart Our Business Startups (JOBS) Act to end the ban on general solicitation and advertising in private offerings of securities under Regulation D Rule 506 offerings. This will only be permitted when all investors are “accredited” (generally with $200,000 income or $1 million net worth). This is a major change for sure. It is expected to usher in an era of mass emails and online-based offerings which previously were not permitted. It can also allow private equity and hedge funds to advertise for investors in their funds.

SEC Chair Mary Jo White, saying, “Our capital markets are the envy of the world,” combined the adoption of this rule with another rule, required by the Dodd-Frank Act, to prohibit “bad actors” from participating in Regulation D 506 offerings. This helped address some fears the commissioners had about such a wide-ranging deregulatory move as eliminating the solicitation ban. The JOBS Act requires companies to take reasonable steps to verify someone’s accredited status. The SEC is mostly leaving that to the marketplace to decide what’s reasonable, but will offer non-exclusive “safe harbors” that you would be able to rely on it you choose. They did not yet specify what these are, we’ll let you know when the actual rule language is released, probably in a few days. An economist noted that the median size of Reg D offerings in the last four years is $2 million, making clear that this is a crucial fundraising method for smaller companies who create the vast majority of new jobs.

They also proposed a new set of initially burdensome-sounding rules which would, among other things, require companies to submit their advertising literature to the SEC (this will not be available to the public and will only apply for the next two years) and file Form D with the SEC at least 15 days before doing any advertising. Also much more information about the offering, use of proceeds, nature of the investors, etc. will have to be disclosed. Two commissioners voted against this proposal, which was approved and will now would be open for comment before final adoption.

But a big day for sure for those of us working with smaller companies now that the ban on general solicitation is officially history.