Debevoise & Plimpton: SEC Lifts Ban on Solicitation and Publicity Activities

As mandated by the Jumpstart Our Business Startups (JOBS) Act, the Securities and Exchange Commission recently adopted amendments to Rule 506 of Regulation D under the Securities Act of 1933 that eliminate the ban on “general solicitation” and “general advertising” in connection with securities offerings conducted under that rule. As a result, private equity funds and portfolio companies will be able to engage in a broader range of investor solicitation and publicity activities. The rule changes become effective on September 23, 2013.

The general solicitation ban has meant that private fund sponsors were not permitted to advertise fund offerings in newspapers or on the Internet, issue press releases or send mass mailings about fund offerings, speak to the press or at public conferences about fundraising, or make offering documents available online except on a password-protected basis. Under new Rule 506(c), a sponsor may engage in these previously forbidden marketing activities if, among other things, (i) all fund investors are reasonably believed to be “accredited investors” and (ii) the fund takes “reasonable steps” to verify that the investors are accredited investors.

The reasonableness of the verification method will be based on the facts and circumstances. Relevant factors include the type of the investor (e.g., an institution or a person), the information that the sponsor has about the investor, the means of solicitation (e.g., through a website) and the terms of the offering. For example, if the minimum investment amount is high enough, the need for additional verification procedures may be reduced. The new rule also specifies four acceptable (but not exclusive) verification methods, including reviewing applicable IRS forms or bank statements and written confirmations from reliable third-parties.

Constraints on general solicitations continue to exist under other regulatory regimes. For example, a fund managed by an adviser that relies on certain exemptions from CFTC registration will not be able to engage in a general solicitation until the CFTC issues appropriate guidance. In addition, a general solicitation may raise issues in non-U.S. jurisdictions where the fund may be offered. Thus, the new Rule 506(c) may be of limited utility for certain offerings. Rule 506(b) will continue to be available for private offerings that do not involve a general solicitation.

In response to concerns that general solicitations may raise investor protection issues, the SEC proposed additional rule amendments that would impose additional burdens on offerings that involve general solicitations. The amendments would require, for example, (i) the filing of a Form D (the form filed with the SEC and certain states in connection with Regulation D offerings) 15 days prior to a general solicitation, (ii) additional Form D disclosures concerning the fund, its investors and the offering, and (iii) the inclusion of specified disclosures in general solicitation materials, particularly if the material includes performance information. In addition, for a two year period, general solicitation materials would be required to be filed in advance with the SEC (although such materials would not be publicly available). Comments on these proposals are due by September 23, 2013