Eliminating the Prohibition on General Solicitation

SEC Alert

Eliminating the Prohibition on General Solicitation

By:  Steve Kronengold, David C. Zuckerbrot and Yehuda Kronengold

  © July 2013

All rights reserved


The Securities Act of 1933 prohibits a company from offering or selling its securities without registering such securities with the SEC or using an established exemption from such registration requirements. One such exemption, recorded in rules 505 and 506 of Regulation D, allows companies to sell their securities to “accredited investors”, however this exemption came, until now, with a caveat; a company was not allowed to actively solicit such “accredited investors”, thus significantly impairing companies abilities to engage in the sale of such unregistered securities.The SEC recently adopted amendments to Rule 506 of Regulation D under the Securities Act of 1933 to implement Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act).  The amendments to Rule 506 permit an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors.    


Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration.  Rule 506 of Regulation D was originally adopted by the SEC as a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act providing for an exemption from registration for the sale of securities “not involving any public offering,”, without limitation as to the dollar amount of the offering, to an unlimited number of “accredited investors” and up to 35 non-accredited investors who meet certain “sophistication” requirements.  Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels. 

Section 201(a)(1) of the JOBS Act directed the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506, provided that sales executed in accordance with such general solicitation or general advertising are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.

The New Rules

On July 10, 2013, the SEC adopted changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

●          All terms and conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied.

 ●          All purchasers of the securities are accredited investors pursuant to Rule 501 of Regulation D. 

●          The issuer takes reasonable steps to verify that the investors are accredited investors.

Under Rule 501, a person qualifies as an accredited investor if he or she has either:

●          An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence.

●         An individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

An issuer is required to consider the particular facts and circumstances of each purchaser and the transaction.  The final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors.

The methods described in the final rule include:

●          Reviewing copies of any IRS form that reports the income of the purchaser for the past two years, and obtaining a written representation that the purchaser has a reasonable expectation of reaching the income level to qualify as an accredited investor in the current year.

●         Reviewing one or more of the following types of documents dated within the past three months:  bank statements, brokerage statements, tax assessments, and a report from one of the national consumer reporting agencies, and obtaining a written representation from such person that all liabilities necessary to make a determination of net worth have been disclosed.

●         Obtaining a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status within the past three months and have determined that the person is an accredited investor.

 ●         With respect to any natural person who invested in an issuer’s Rule 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and remains an investor of the issuer, for any Rule 506(c) offering conducted by the same issuer, obtaining a certification by such person at the time of sale that he or she qualifies as an accredited investor.

It should be noted that the existing provisions of Rule 506 continue as a separate exemption so that issuers conducting Rule 506 offerings without the use of general solicitation and general advertising are exempt from the new verification rule, and can continue to conduct their offerings in the same manner as past Rule 506 offering practice.

In addition, the final rule amends Form D, which is the notice that issuers must file with  the SEC when they sell securities under Regulation D.  The revised form adds a separate box for issuers to check if they are claiming the new Rule 506 exemption that permits general solicitation or general advertising.

As part of the same final rules release, the SEC also amended Rule 144A to provide that securities may be offered pursuant to Rule 144A to persons other than qualified institutional buyers, including via general solicitation or general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are qualified institutional buyers.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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