Saturday, August 24, 2019

JOBS Act Client Alert - Rules 506 of Regulation D

Posted by OnCourse Staff May 11, 2012 2:48pm

Photo Credit: Stuart Miles

By: Paul Bork and Dean F. Hanley (JD Supra)

The JOBS Act (the “Act”), signed into law on April 5, 2012, promises to have a significant impact on two popular exemptions to registration of securities under federal securities laws. Currently, any issuer intending to rely on either Rule 506 of Regulation D or Rule 144A cannot engage in any general solicitation or advertising to attract investors. The Act directs the SEC to remove this prohibition. In addition, the Act exempts certain persons who connect Rule 506 issuers to potential purchasers from registering as a broker or dealer. Much of the interpretation of these provisions is left up to the SEC, which has 90 days to publish final rules, and until the SEC publishes its rules, the current Rules 506 and 144A and related guidance should be followed. Regardless of whether the shift is subtle or dramatic, the changes to Rules 506 and 144A will certainly affect how private capital is raised in the future.

Background

Under federal securities laws, prior to the sale of any securities, the securities must either be registered with the SEC, or exempt from registration. One popular exemption for issuers is Rule 506 of Regulation D, which, subject to a number of conditions, allows an issuer to sell its securities to so-called “accredited investors” (AIs) in a private placement transaction. An AI is currently defined as a business entity with at least $5 million in assets and individuals with a net worth of at least $1 million (excluding the individual’s primary residence) or an annual income of at least $200,000 (or $300,000 together with the individual’s spouse). However, in order to qualify for a Rule 506 exemption, the securities cannot be sold through means of general solicitation or advertising to the public at large.

A second useful exemption is Rule 144A, which provides an exemption from registration for the resale, generally by underwriters or investment houses, of certain types of previously issued securities, provided that the securities are only offered or sold to “qualified institutional buyers,” or QIBs. A QIB includes entities that hold at least $100 million in securities, and other categories of financially sophisticated entities enumerated in the Rule.

General Solicitation

The Act directs the SEC to amend Rule 506 and Rule 144A to provide as follows:

  • Rule 506. An issuer relying on Rule 506 may now offer the securities through general solicitation or general advertising so long as the issuer takes “reasonable steps” to verify that all purchasers are accredited investors.
  • Rule 144A. A seller relying on Rule 144A may now offer the securities, including through public solicitation or advertising, to persons other than QIBs, although the seller must still “reasonably believe” that all of the purchasers are QIBs.

However, the Act does not identify what “reasonable steps” a Rule 506 issuer must take, or what it means to “reasonably believe” that a purchaser is a QIB, instead leaving it up to the SEC to provide final rules within 90 days. Until such time, we do not recommend that an issuer or Rule 144A seller engage in general solicitation in connection with a Rule 506 or 144A transaction.

Effect on the Integration Doctrine. Another open question is whether a Rule 506 offering that is “marketed” by means of a general solicitation (as will be permissible under revised Rule 506 pursuant to the Act) will be deemed by the SEC to be part of a subsequent public offering, thereby rendering the unregistered Rule 506 private placement improper, and requiring registration of the entire offering. The SEC employs this doctrine, known as integration, in order to prevent issuers from improperly circumventing the registration process, but the SEC has made it clear that under some circumstances an issuer may indeed sell securities privately while in the process of registering a public offering. In 2007, the SEC released guidelines addressing the risk of integration of such concurrent offerings, and emphasized that the analysis centers on the methods used to solicit investors. Generally, the SEC will not integrate the two offerings if the issuer does not solicit investors for the private placement through “general solicitation.” Given that general solicitation is now allowed in connection with Rule 506 offerings, this analysis no longer seems clear, and issuers will require further guidance from the SEC regarding integration.

Brokers-Dealers

The Act also creates a new exemption from broker-dealer registration for certain persons facilitating Rule 506 offerings. Specifically, a person does not have to register as a broker-dealer solely because: (1) the person maintains a platform or mechanism that permits the offer, sale, purchase or negotiation of securities in connection with a Rule 506 offering; (2) the person or its affiliates co-invest in the Rule 506 offering; or (3) the person provides ancillary services with respect to the Rule 506 offering. Ancillary services include due diligence services, so long as such services do not include investment advice for separate compensation, and furnishing standard investment documents, provided that the person does not negotiate the offering terms and the standard documents are not required to be used by issuers. Significantly, the person may not receive any compensation in connection with the sale of securities under Rule 506.

In recent years, various websites emerged to connect willing investors to companies seeking capital. Under the new exemption, these sites are now explicitly exempt from having to register as broker-dealers in connection with Rule 506 transactions originating on their site. The impact will likely be felt most strongly online, but the language of this exemption is broad enough to encompass other platforms for connecting sellers and purchasers as well. Although a person seeking exemption from broker-dealer registration under this provision cannot receive compensation in connection with the sale of securities, a website may be able to charge an access or membership fee that is not tied directly to the sale of securities. Until the SEC provides more guidance, it is unclear how or whether such a fee would render a person ineligible for the exemption.

If you have any questions, please contact Dean Hanley or Paul Bork of Foley Hoag’s Corporate Finance and Securities Practice Group or (617) 832-1000 or contact your lawyer at Foley Hoag.  

Photo Credit: Stuart Miles

Comments

Add a comment

  • Required fields are marked with *.

If you have trouble reading the code, click on the code itself to generate a new random code.



 Image

OnCourse Staff

The OnCourse writing staff work to keep you informed about the most pertinent financial industry news of the moment



OnCourse Staff's Posts Subscribe to RSS Feed



Flood Coverage – Still a Hot Regulatory Issue
Interagency Statement on Sharing BSA Resources and Challenges
New Jersey's Corporate Business Tax Legislation: A Look at the Impact for Banks
Correspondent Banking: The Challenges of Data Transparency
Regulation E and Business Account Errors
Controls over Employee and Officer T&E Expenses
Is Regulation CC Put on the Back Burner?
Training – An Investment and Risk Management Tool
Are You Gambling with Your BSA Program?
The Case of Foreign Banks and Heightened Scrutiny
IRS and New Jersey Tax Audits of Banks
State Taxation of Financial Institutions in Today's Environment
Does your 401(k) Plan need an Audit?
De-Risking of Foreign Correspondent Banks
Same Day ACH Credits – Phase One
FinCEN Finalizes Ruling on Beneficial Ownership and Ongoing Customer Due Diligence
Keep an Eye On Your Chip!
Is the IRS Status of your Defined Benefit plan in Jeopardy?
The Dilemma of Banking Medical Marijuana Businesses and Other Indirect Risks
Is your Institution Monitoring Working Capital Lines of Credit?
Financial Reporting and Regulatory Update on the Horizon
BSA/AML Training: Is your program effective?
Planning in a Consolidating Banking Industry
To opt-out or not to opt-out, that is the question – A reminder on March 31, 2015 Call Report, Schedule RC-R, item 3.a
Anti-Money Laundering – The Age of Technology
Top Compliance Topics Discussed at the NJ Bankers Compliance University
Some tips and tricks for dealing with Regulatory Examinations
Updated Regulation E Booklet from the OCC!
Is Flood Disaster Still on the Heat Map?
Have You Implemented Your Plan yet?
FDIC Consumer Newsletter
More Flood Insurance Changes...
Same Sex Married Couples - Ensuring Equal Treatment – Announcement from Consumer Financial Protection Bureau
Truth in Lending (Regulation Z) Annual Threshold Adjustments (CARD ACT, HOEPA and ATR/QM)
FFIEC Releases Revised BSA/AML Examination Manual: So what’s new?
OFAC Consolidates Non-SDN Listings
Coping with HOPA
Coping with the CFPB’s Ability-to-Repay Rule
ABA Survey on Impact of Dodd Frank Compliance
ABA Mortgage Origination Deskbook
Who handles Your Dormant Accounts?
Appraisal Disclosure Rule
Cybercriminals Broaden their Attacks in Social Networks
The Importance of Segregating a Bank’s Credit Function from its Lending Function
Appraisal Management Companies in Regulatory Crosshairs
All About the Home Owners Protection Act
Requesting Current Financial Information
Countdown to Windows XP End of Life and Support: Are you still at Risk?
314(b) Distinct Advantages for Financial Institutions
Where is the Document?
Building a Better Hen House
Ready the Ramparts! : IT Security and the Modern Bank
The Credit -- Er, IT Crisis?
Keeping the Balance: IT Security and the Org Chart
IT Security: "IT's" About Process
Wag the Dog
Consumerization of Technology and its influence on Information Security
Detective, Reactive and Preventive: Evolving Your IT Security
Do You Know The Security Features of the New $100 Bill?
Segregation of Duties for Wire Transfer Processing
How do you charge Early Withdrawal Fees on Time Deposits?
Do you still offer NOW Accounts?
Policy Changes Required – Do you Wait until Annual Approval?
Summarizing ACAMS White Paper on EDD and AML Risk Assessments (Industry Survey)
ACAMS to provide Free Webinar
ACBB Changes its Name
Who Do You Give Cash to?
ABA Briefing to Help Banks Address Cyber-security Threats
The OCC Issues Booklet: “A Common Sense Approach to Community Banking”
Safe Deposit Box Contents are not insured – But They COULD Be!
Allowance for Loan Loss Tips and Tricks
FDIC Can Review New Products
Let’s Talk About Overdrafts!
Community Banks Slowly Warm Up to Private Student Loans
Has your Bank updated the Adverse Action Notice?
Regulation E and NACHA Rules: When you Want to Stop Payment on a Recurring Debit
CFPB Stands Up Against Poor Debt Collection Practices
Don’t Forget the Small Stuff
Double Endorsed Checks: What is the Risk?
Social Media – Will the Regulators Do Spot Checks?
How Does Your Bank Handle Customer Requested Maintenance Changes?
OCC Releases Booklet on "Common Sense" Community Banking
New SAR Filing Updates
Is your BSA/AML automated monitoring system up to par?
The Importance of BSA Training
Office of Foreign Assets Control (“OFAC”) introduces the OFAC SDN Fuzzy Logic Search Tool
Filing the New CTR Forms: What you need to Know
FFIEC Proposed Risk Management Guidance on Social Media: Beware and Prepare
Solutions to Reducing Dormant Accounts at Your Institution
Pandemic Preparedness: Are you testing your Pandemic Plan?
Regulation E Foreign Remittance Rules
FFIEC issues revised “Supervision of Technology Service Providers” booklet
Expiration of Unlimited Deposit Insurance for NIBTAs
Is Your Institution's Marketing UDAAP Compliant?
What is Enterprise Risk Management?
New OCC Guidance Released on Investor Owned Properties
Electronic Work Papers - Why P&G Made the Switch
OCC to Toughen Exams in Response to United States Senate Permanent Subcommittee On Investigations
Clarifying Regulatory Obligations Regarding Continuing Activity SAR Filings
Federal Regulatory Agencies Proposal New Rule
Risk management - Smaller institutions and the benefits of ERM
Strengthening Your Loan Maintenance Monitoring
New Lending Proposal from CFPB
FDIC Reaches Settlement on Overdraft Fees
FRB Guidance on Foreclosures
Loan Denials and Withdrawals – Tips to Sure Up your Process
Regulation O – 5 Easy ways to avoid violations
The Summer of CFPB Proposals
Community Lenders Seize Market Share From Big Banks by Using Advanced Online Lending Technology
Dodd-Frank Rule to Change Legal Lending Limit Monitoring Requirements
The ABCs of a TDR
Supreme Court ruling for the Freeman, et al. v. Quicken Loans, Inc case
New FinCEN Guidance for CTR Aggregation for Businesses with Common Ownership (FIN – 2012 –G001)
Senior member of House of Financial Services Committee Introduces Overdraft Protection Act
FinCEN is looking to streamline the financial institution reporting process by issuing mandatory E-filing reporting requirements.
Curry: Operational Risk Now OCC’s Top Concern
JOBS Act Client Alert - Rules 506 of Regulation D
New Rules Proposal for Servicers Coming from the CFPB
Wall Street Receives Volcker Rule Clarity
De-stressing with stress testing
Banks Participate in Information Sharing to Battle Online Theft
IT security: Is your program still effective?
Banking Solutions: ALLL and GAAP in Agreement
How are the most recent regulatory enforcement trends that banks are facing today affecting internal audit? Why?
What are the most recent regulatory enforcement trends that banks are facing today?
Mobile banking: How do we get there?
UBS further struggles with $2 Billion loss by Rogue Trader
Capital One Becomes Dodd-Frank Test as Nation’s Fifth Largest Bank
Community Banks to receive US Funding for Small Businesses
FDIC fields questions about overdraft guidance
Negligent Hiring – A mistake can cost more than just money!
Regulatory Burden – Managing the Pain
From Embezzlement to Imprisonment: Former Citigroup employee faces charges with $19.2 million in bank fraud
TDR or Not to TDR …Much Ado about Nothing?
Finding the Right Hire
Model behavior: Is your ALM model capturing your bank’s risks?
ALLL best practices: Pay attention to qualitative factors
Abandoned Property Law, and its new New York State of Mind
Consumerization of Technology and its influence on Information Security
FDIC releases Provisions on Dodd-Frank to help Community Banks
Social Media in the Employment Arena – It Gets Funky!
The Proof is in the Pudding: Affects of Dodd-Frank on Community Banks
Banks and Businesses get "swiped" over Fees
A little bit of this, and a little bit of that: Fed Unveils list of Banks Helped during Financial Crisis of 2008
IT Security: "IT's" About Process
To Test or Not to Test; That is the Question
2011 Failed Bank List Hits 25
Wag the Dog
Committee on Financial Services to Hold Hearing on the Effects of Dodd-Frank on Small Biz and Banks Today
2011 Failed Bank List up to 18
A Culture of Whatever: On the Path to Proper Governance
The Test Drive: Leasing or Buying a HR IT Platform
Detective, Reactive and Preventive: Evolving Your IT Security
Cracking the ALLL Code: How to Develop the Right FAS 114 Methodology
Double Digits: Bank Closings up to 11 in 2011
FCIC Releases Report on the Causes of the Financial Crisis
Part of the In Crowd: Thoughts on the Dodd-Frank Act
Another One Bites the Dust: Regulators Close 4 Banks
Keeping the Balance: IT Security and the Org Chart
On Notice: FDIC Issues Rule for Temp Unlimited Deposit Insurance
2011 Failed Bank List Up to 3
Welcome to OnCourse
Stick 'Em Up!
Time for a Tune-Up: The Necessity of a HR Audit
Visa Instituting Two-Tiered Debit Card Interchange Structure
The First Failed Banks of 2011
The Credit -- Er, IT Crisis?
Painting a Masterpiece: The Art of the ALLL Reserve
The Law on Your Side: Understanding HR Regulations in 2011
Building a Better Hen House
Ready the Ramparts! : IT Security and the Modern Bank
No Respite from RESPA