Comments Show Divergent Responses to Proposed SEC Advertising Rules
October 30, 2012 § 2 Comments
After multiple delays, the SEC finally proposed rule changes to permit advertising under Rule 506 offerings and invited comments from the public. To date, the SEC has received over 150 of comments which show a wide range of responses to the proposed rule. Given the number and range of responses, we anticipate slow going for adoption of final rules.
Although the comment period ended in late September, a steady stream of comments continues. Comments have been submitted from US Senators, state securities regulators, industry groups, professionals in the investment management industry, individual investors, and anonymous parties.
Under the proposed rule, issuers may advertise in a Rule 506 offering provided each investor is accredited. To verify an investor’s accredited status, issuers should consider all the facts and circumstances concerning the investor. Items to be considered include:
- The type of investor and type of accredited investor that the investor claims to be;
- The amount and type of information that the issuer has about the investor; and
- The nature of the issuer’s offering–i.e., the manner in which the investor was solicited and the terms of the offering, such as the minimum investment amount.
Many industry groups and investment management professionals have commended the SEC for its flexible approach. Several have suggested adopting safe harbor provisions–minimum investment amounts or documented certifications, for example–to give issuers certainty that their determinations of accredited investor will be definitive.
State securities regulators have, on the other hand, objected to the SEC’s flexible approach. Several have requested that the proposed rule provide a list of specified methods that issuers will be permitted to use to verify accredited investor status. Similarly, a group of seven Democratic senators find the proposed rule “fatally flawed” for its failure to establish specified methods sufficient to limit advertised offerings to accredited investors.
Fundamentally, the proposed rule has removed current uncertainty over what constitutes a general solicitation and replaced it with uncertainty over whether an issuer has done enough to determine an investor’s accredited status. Given the current proposed rule, this may be an attractive trade for issuers wanting to advertise. The proposed rule has not mandated any specified steps or procedures required by issuers. In addition, the SEC has stated that so long as an issuer took reasonable steps to verify and investor’s status and reasonably believed the investor was accredited, there will not lose the safe harbor for its offering.
It remains to be seen, however, whether the rule as proposed will be adopted and, if so, when. The SEC has established a pattern of moving slowly with its rulemaking obligations under both Dodd-Frank and the JOBS Act. Additional pressure from Congressional sources and other regulatory authorities could lead to signifiant changes to the rule as ultimately adopted.
- Text of Proposed Rule (SEC Release 33-9354)
- SEC Website: Comments on Proposed Rule:Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
- SEC Proposes JOBS Act Rules to Allow Advertising in Private Offerings (prior post)
Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433 or by email.