On July 10, 2013, the Securities and Exchange Commission (the "SEC") adopted new rules to implement certain requirements of the Jumpstart Our Business Startups Act of 2012 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. These new rules amend the SEC requirements for private offerings by:

• Allowing issuers of securities in Rule 506 private offerings to promote the offering through general solicitation and advertising;
• Allowing sellers to sell securities under Rule 144A, including by means of general solicitation, to qualified institutional buyers¹ ("QIBs") or purchasers that the seller reasonably believes are QIBs; and
• Disqualifying certain issuers from relying on the Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event."

In connection with these new rules, the SEC also proposed amendments to Form D that would require issuers to provide additional information about their private offerings and subject issuers to stricter penalties for failure to comply with the requirements.

General Solicitation in Rule 506 Offerings

Issuers seeking to raise capital through the sale of securities have done so by either (1) a public sale through a registered offering or (2) a private sale through an exemption from the registration requirements of the Securities Act of 1933. According to the SEC, Rule 506 is by far the most widely used exemption under Regulation D.² Historically, under Rule 506, issuers have been prohibited from advertising the offering to the general public (e.g., through newspapers, television, unrestricted websites and social media).

Under new Rule 506(c), an issuer is permitted to engage in general solicitation and advertising for a Rule 506 offering so long as:

• All purchasers are accredited investors (or the issuer reasonably believes they are accredited);
• The issuer takes reasonable steps to verify the purchasers are accredited investors; and
• All terms and conditions of Rule 501 (definitions under Regulation D), Rule 502(a) (integration), and Rule 502(d) (private resale restrictions) are satisfied.

Under new Rule 506(c), to determine whether the accredited investor verification steps are reasonable, the SEC has adopted a "principles-based" approach. This approach requires that an issuer make an objective determination of whether its verification steps are reasonable in light of (1) the nature of the purchaser and the type of accredited investor that the purchaser claims to be, (2) the amount and type of information that the issuer has about the purchaser, and (3) 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 the minimum investment amount (if any). After consideration of the facts and circumstances of the purchaser and the transaction, the more likely it appears that a purchaser qualifies as an accredited investor, the fewer steps the issuer would have to take to verify accredited investor status, and vice versa.³

Issuers should retain adequate records regarding the steps taken to verify that a purchaser is an accredited investor. The SEC does not believe an issuer has taken reasonable steps to verify accredited investor status if the issuer requires only that a person check a box in a questionnaire or sign a form (absent other information indicating accredited investor status).

In addition to the "principles-based" approach, Rule 506(c) also provides a non-exclusive list of four methods that issuers may use to satisfy the verification requirements with respect to individuals:

• For the income test, reviewing copies of the individual's IRS forms that report income for the past two years (e.g., Form W-2, 1099, or 1040 or Schedule K-1) and obtaining a written representation that the individual has a reasonable expectation of reaching the income level necessary during the current year;
• For the net worth test, reviewing one or more of the following types of documents, dated within the prior three months, and by obtaining a written representation from the individual that all liabilities necessary to make a determination of net worth have been disclosed.  For assets:  bank statements, brokerage statements, and other statements of securities holdings, certificates of deposits, tax assessments and appraisal reports issued by independent third parties are deemed to be satisfactory; and for liabilities, a consumer or credit report from one of the nationwide consumer reporting agencies is required;⁴
• Receiving written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant that such person or entity has taken reasonable steps to verify that the individual is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor; and
• If the individual previously participated in a Rule 506 offering by the issuer as an accredited investor and remains an investor of the issuer, obtaining a certification from the individual that at the time of sale such individual qualifies as an accredited investor.

The new verification rules only apply to issuers who are using general solicitation and advertising in connection with their Rule 506 offering. Issuers will continue to have the ability under Rule 506(b) to conduct Rule 506 offerings subject to the historical general solicitation prohibition, in which case issuers will not be subject to the new verification requirements.

Rule 144A

Securities can be sold under Rule 144A, including by means of general solicitation, so long as the securities are sold to a QIB or to a purchaser the seller reasonably believes is a QIB. The general solicitation permitted in Rule 144A resales by the initial purchaser(s) to the QIBs will not affect the availability of the Section 4(a)(2) exemption from registration for the initial sale of the securities by the issuer to the initial purchaser(s).

Disqualification of Bad Actors

Under new Rule 506(d), the Rule 506 exemption is not available to an issuer if the issuer or any other "covered person" related to the issuer experiences a "disqualifying event."

Under the new rule, a "disqualifying event" includes the following:

• Criminal convictions, court injunctions and restraining orders involving certain securities matters;
• Final orders from certain financial regulators that bar certain conduct;
• Certain SEC disciplinary orders, cease and desist orders and stop orders;
• Suspension or expulsion from membership in, or association with a member of, a self-regulatory organization; and
• U.S. Postal Service false representation orders.

"Covered persons" include the issuer, any predecessor and affiliated issuers, and the following:

• Directors, executive officers, other officers participating in the offering, general partners and managing members of the issuer;
• 20% or more beneficial owners of the issuer, calculated based on voting power;
• Promoters of the issuer;
• Investment managers of issuers that are pooled investment funds as well as any general partner or managing member of such investment manager, and any directors, officers and other officers participating in the offering of such investment manager or general partner or managing member of such investment manager; and
• Persons compensated (directly or indirectly) for soliciting investors as well as the general partner or managing member of such solicitor, and any directors, executive officers and other officers participating in the offering of such solicitor or general partner or managing member of such solicitor.

Issuers will not be disqualified from using Rule 506 as a result of disqualifying events that occurred before the effective date of new Rule 506(d). However, issuers must disclose these pre-rule disqualifying events to investors (unless the issuer did not know, and in the exercise of reasonable care could not have known, of the existence of the disqualifying events). The SEC expects issuers to give reasonable prominence to the disclosure.

Proposed Amendments to Regulation D and Form D

In connection with the new SEC rules, the SEC proposed additional rules that, if adopted, would require more information from issuers relying on the Rule 506 exemption and provide stricter penalties for noncompliance. The proposed rules would require issuers to file a Form D at least 15 days before engaging in any general solicitation for a Rule 506(c) offering and, within 30 days of completing the offering, file a Form D amendment to update the information and indicate the offering has ended.⁵ Additionally, the current Form D would be amended to require additional information from the issuer such as (1) identification of the issuer's website, (2) information about the offered securities and the types of general solicitation used in the offering, (3) information about the use of proceeds from the offering, and (4) expanded information about the issuer and the types of investors.

Under the proposed rules, an issuer would be disqualified from using the Rule 506 exemption in future offerings if the issuer did not comply with the proposed Form D filing requirements. The ban would last for one calendar year after the issuer files the required Form D filings.

The SEC is accepting comments to the proposed rules for a 60-day period.