ICM Client Alert - US Securities Law Update: Proposed Rules Issued Pursuant to JOBS Act

On April 5, 2012, President Obama signed into law the “Jumpstart Our Business Startups Act” (the “JOBS Act”). The JOBS Act seeks to increase access to the US capital markets for small businesses through easing the regulation of public offerings and public companies in the United States, following a notable decline in US public offerings over the last decade.

Under the JOBS Act, the Securities and Exchange Commission (the “SEC”) is required to amend both Regulation D and Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”) to lower regulatory requirements for issuers using these private placement exemptions. In particular, the mandate requires the SEC to amend these exemptions so that issuers will no longer be subject to the prohibition on general solicitation and general advertising, provided that all eventual purchasers of the securities are accredited investors in the case of Regulation D and qualified institutional buyers (“QIBs”) in the case of Rule 144A. The issuer must be able to prove that it took reasonable steps to verify that the purchasers of the securities are accredited investors or, in the case of Rule 144A, the issuer reasonably believes the purchasers are qualified institutional buyers.

Earlier this week, on August 29, the SEC released proposed rules relating to the prohibition against general solicitation and general advertising in offerings availing of the exemptions discussed above. The SEC has opened a 30-day public comment period on the proposed rules and expects to adopt final rules shortly thereafter.

Currently issuers offering securities through a private placement using the exemptions from registration under Rule 4(a)(2) and the related safe-harbor under Rule 506 of Regulation D or Rule 144A of the Securities Act are prohibited from using general solicitation or general advertising in any form in connection with the offering. Under Section 201(a)(1) of the JOBS Act Congress directs the SEC to lift this ban in order to allow issuers to make potential investors aware of the offerings with the hope that this will provide issuers with better access to the capital markets.

The Proposed Rules

Under the proposed rules, an issuer using the exemption from registration under Rule 506 would be allowed to use general solicitation and general advertising in connection with the offering so long as it takes “reasonable steps” to ensure that the ultimate purchasers of the securities are accredited investors.

In the proposed rule the SEC provides various factors that an issuer should consider in the context of the “facts and circumstances” of the transaction in order to verify whether the purchasers are accredited investors. These include the following:

• 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; and
• the nature of the offering, meaning:
  • the terms of the offering, such as a minimum investment amount.
  • the manner in which the purchaser was solicited to participate in the offering; and

In the proposed rule the SEC noted that it did not want to provide specific criteria to be met in establishing the “reasonable steps” as this would potentially be overly burdensome on certain issuers and potentially ineffective in certain circumstances.

The existing version of Rule 506 will remain in place as a separate exemption for issuers not wishing to use general solicitation and general advertising, and these issuers will not be subject to the verification requirements discussed above.

The proposed rules include amending Form D so that an issuer taking advantage of the revised Regulation D could indicate this by checking a box.

Finally, under the proposed rules, issuers using the exemption in Rule 144A would be permitted to use general solicitation and general advertising, so long as the securities are ultimately sold only to purchasers that the seller (or anyone acting on its behalf) reasonably believes are QIBs.