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S.E.C.'s fact sheet on eliminating the prohibition on advertising in certain offerings

S.E.C.'s fact sheet on eliminating the prohibition on advertising in certain offerings

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Published by: DealBook on Aug 29, 2012
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Eliminating the Prohibition on General Solicitation and General Advertisingin Certain Offerings
SEC Open MeetingAug. 29, 2012
The Commission will consider whether to propose rules to eliminate the prohibition againstgeneral solicitation and general advertising in certain securities offerings. The rules, which aremandated by the Jumpstart Our Business Startups Act, relate to solicitations and advertisingconducted under Rule 506 of Regulation D of the Securities Act and Rule 144A of the SecuritiesAct.
The Current Offering Process
Companies seeking to raise capital through the sale of securities must either register thesecurities offering with the SE
C or rely on an exemption from registration. Most of the SEC’s
exemptions from registration prohibit companies from engaging in a general solicitation orgeneral advertising in connection with securities offerings
that is, advertising in newspapers oron the Internet among other things. Rule 506 is one of those exemptions.
 JOBS Act 
The JOBS Act, enacted earlier this year, directed the SEC to remove the prohibitions on generalsolicitation or general advertising for securities offerings relying on Rule 506. By requiring theSEC to remove these restrictions, Congress sought to make it easier for companies to inform thepublic that they are seeking to raise capital through the sale of securities.In particular, Section 201(a)(1) of the JOBS Act directs the SEC to amend Rule 506 to permitgeneral solicitation or general advertising provided that all purchasers of the securities are
accredited investors. It also says that “[s]uch rules shall require the issuer to take reasonable
steps to verify that purchasers of the securities are accredited investors, using such methods asd
etermined by the Commission.”
The new law also directs the SEC to revise Rule 144A, which governs the resale of securitiesprimarily by larger institutional investors known as qualified institutional buyers (QIBs). Undercurrent Rule 144A, offers of securities can only be made to QIBs. Under the new law, Rule144A would be revised so that offers of securities could be made to investors who are not QIBsas long as the securities are sold only to persons whom the seller reasonably believes are QIBs.
The Proposed Rules
 Rule 506 
Under the proposed rules, companies issuing securities would be permitted to use generalsolicitation and general advertising to offer securities, provided that:
The issuer takes reasonable steps to verify that the purchasers of the securities areaccredited investors.
All purchasers of securities are accredited investors, because either:
They come within one of the categories of persons who are accredited investorsunder existing Rule 501.
The issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.Under Rule 501, a natural person qualifies as an accredited investor if he or she has individualnet worth
or joint net worth with a spouse
that exceeds $1 million at the time of the purchase,excluding the value of the primary residence of such person. Or, if he or she has incomeexceeding $200,000 in each of the two most recent years or joint income with a spouseexceeding $300,000 for those years and a reasonable expectation of the same income level in thecurrent year.In determining the reasonableness of the steps that an issuer has taken to verify that a purchaseris an accredited investor, the proposing release explains that issuers are to consider the facts andcircumstances of the transaction. This includes, among other things, the following factors:
The type of 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.
The nature of the offering, meaning:
The manner in which the purchaser was solicited to participate in the offering.
The terms of the offering, such as a minimum investment amount.The
proposing release notes that proposing specific verification methods that an issuer
must use “would be impractical and potentially ineffective in light of the numerous ways in
which a purchaser can qualify as an accredited investor
We are also concerned that aprescriptive rule that specifies required verification methods could be overly burdensome insome cases, by requiring issuers to follow the same steps, regardless of their particularcircumstances, and ineffective in others, by requiring steps that, in the particular circumstances,would not actually verify acc
redited investor status.”
 The proposed rules would preserve the existing portions of Rule 506 as a separate exemption sothat companies conducting 506 offerings without the use of general solicitation and generaladvertising would not be subject to the new verification rule.

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Elizabeth Crum added this note
Create Jobs? Where? This is just more smoke up the....nose about Wall Street reform which will never happen. "NY Fed gets reprieve." They missed something: "For good."

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