Solicitation Rule Changes – Part I

As noted in a prior post, general solicitation of investors for private investment has historically been prohibited under SEC rules. This has meant that a party seeking investment could not solicit the public to find investors through such means as websites, radio or television ads, articles in trade publications or magazines, and so on. Accordingly, parties seeking investment have always had to maintain a careful watch over how they look for, and find, investors.

In 2012, Congress passed, and the President signed, the Jumpstart Our Business Startups Act (JOBS Act). The law directs the SEC to end the ban on solicitation of private investors as a way to try to encourage investment. Since then, the SEC has been working on new rules to end the ban. The new rules where adopted by the SEC on July 10, 2013 and will go into effect on September 23, 2013.

The new rules will allow solicitation of private investors, but with certain restrictions. Specifically, the purchasers of new private investment must be accredited investors, and the issuer of the securities must take “reasonable steps to verify” the purchasers are accredited investors.

The burden of showing that the issuer took reasonable steps is with the issuer. The SEC has stated that the factors it will consider include:

  • The nature of the purchaser and the type of accredited investor that the purchaser claims to be;
  • The amount and type of information that the issuer has about the purchaser; and,
  • The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.

 

At the same time, the SEC will leave open the existing rules for obtaining investment when there is no public solicitation. Accordingly, it is likely there will be two different methods of obtaining investors; one which involves private inquiries, and one which involves public solicitation. Issuers will need to consider which process best meets their needs given the respective advantages and constraints.

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