The SEC Approves JOBS Act Rules (with Delta Strategy Group Meeting Summary) (with Lofchie Comment)

The SEC approved three final rules implementing the JOBS Act at an open meeting on Rule 506 of Regulation D ("Exemption for Limited Offers and Sales without Regard to Dollar Amount of Offering") of the Securities Act. The following rules were approved:

• Amendments to Rule 506 of Regulation D and Rule 144A to Section 201(a) ("Modification of Rules") of the JOBS Act so as to eliminate the prohibition on general solicitation and advertising for certain offerings made pursuant to Rule 506 and Rule 144A ("Private Resales of Securities to Institutions") under the Securities Act, where the relevant securities are sold only to purchases that are reasonably determined to be accredited investors (in the case of Rule 506 offerings) or qualified institutional buyers (in the case of Rule 144A offerings).
• Disqualification of securities offerings involving certain felons and "bad actors" from reliance on Rule 506, as mandated by Section 926 ("Disqualifying Felons and Other 'Bad Actors' from Regulation D Offerings") of the Dodd-Frank Act.
• Amendments to Regulation D, Form D and Rule 156 ("Investment Company Sales Literature") under the Securities Act that are intended to enhance the SEC's ability to evaluate changes in the market and to address the development of practices in Rule 506 offerings.

Rule 506 is amended by adding a new paragraph (c), which allows the use of general solicitation and advertising in connection with private placements, provided that ALL of the relevant securities are sold to persons whom the issuer takes "reasonable steps to verify" are accredited investors. (The SEC retained paragraph (b) of Rule 506, which permits sales to a limited number of non-accredited investors; the prohibition on the use of general solicitation would continue to apply to Rule 506(b) offerings. Issuers seeking to rely on Rule 506(c) should thus be mindful of the concept of integration; in short, once they have engaged in any general soliciation, they would have to stop such solicitation for a considerable period before they could subsequently conduct any sales in reliance on Rule 506(b).)

A comparable change was made to Rule 144A.

Securities sold in reliance on Rle 506(c) and amended Rule 144A would continue to be "restricted securities."

A good portion of the adopting release (beginning on page 19 and running through page 44), and the majority of text in Rule 506(c), focuses on the procedures that may be implemented in order for an issuer to make a "reasonable determination" that a purchaser is an accredited investor.

Issuers that rely on Rule 506 are required to file a Form D with the SEC no later than 15 days after the first sale of securities in the offering. The SEC did not change this time period, but it did make amendments to the contents of Form D.

As to private funds, the release discusses whether any special limitations should be imposed on their reliance on Rule 506(c), but the SEC decided not to do so. Further, the SEC confirmed that a private fund may sell securities in reliance on Rule 506(c) without losing its exemption from registration under the Investment Company Act (the Section 3(c)(1) and (7) exemptions are not available to funds that make a "public offering").

Likewise, the SEC determined not to raise the standard for determining who qualifies as an accredited investor.

In a related release (33-9414), the SEC added paragraph (d) to Rule 506 in order to provide that an issuer may not rely on Rule 506 if certain persons involved either with the issuer or with the sales efforts have been convicted of certain bad acts; provided, however, with respect to convictions occuring prior to the effective date of the rule, an issuer may continue to rely on Rule 506, but is required to provide appropriate notice as to the bad actor.

Lofchie Comment: Notwithstanding the adoption of these rules and the availability of the rules to private funds, there remains at least some questions as to whether the exemption is available to private commodity pools for the reasons discussed in thislinked letter from the MFA to the CFTC. Issuers, including funds, should also be mindful of the fact that the expansion of the private placement exemption does not carry with it any exemption from broker-dealer registration requirements, and thus issuers should still be mindful that their employees engaged in marketing activities may be regarded as engaged in "broker" activities.

Click here to see a summary of the SEC Open Meeting from Delta Strategy Group.

See:SEC Press Release; SEC Final Rule 33-9415; SEC Final Rule 33-9414.See also: Chair White Statement; Commissioner Walter Statement; Commissioner Aguilar Statements: Item 1, Item 2, Item 3; Commissioner Gallagher Statement; Commissioner Paredes Statement; MFA Comment Letter on SEC's Implementation of the JOBS Act (March 24, 2013).