On August 29, the U.S. Securities and Exchange Commission (SEC) proposed an amendment to its rules to eliminate the current prohibitions on general advertising and general solicitation from certain private placements conducted in accordance with Rule 506 under Regulation D under the Securities Act of 1933 (Securities Act). As discussed in our April 2012 Bulletin, this amendment is required pursuant to the Jumpstart our Business Startups (JOBS) Act enacted in April. As our readers are aware, any offer or sale of securities must be registered or exempt from registration under both the Securities Act and any applicable state securities laws and Rule 506, which exempts from registration (under federal and state law) offers and sales of securities made solely to “accredited investors” and up to 35 non-accredited but “sophisticated” investors, is one of the most often used exemptions for businesses selling stock to raise capital. Accredited investors generally include natural persons with income of $200,000 or $300,000 with their spouse or a net worth (excluding their primary residence) exceeding $1 million, and certain entities, while a “sophisticated” investor means an “investor [that] either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.” Currently, Rule 506 offerings must be made without “general solicitation” or “general advertising;” while there is no formal definition of these terms, examples set forth in Rule 502(c) of Regulation D and SEC interpretations over the years have provided basic guidelines as to what constitutes general solicitation and general advertising.
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