The JOBS Act, Regulation D, and Rule 506(c)
The Jumpstart Our Business Startups (JOBS) Act was signed into law by President Obama on April 5, 2012. The law mandated certain changes to Rule 506 of SEC Regulation D designed to spur capital formation for growing innovators. The required Regulation D reforms took effect on September 23, 2013, after being finalized by the SEC this summer. A summary of these changes is outlined below. This policy overview is not intended to, and does not, constitute legal counsel – issuers should consult their own legal teams before considering an offering and should not rely on this overview when considering such an offering.
What is Rule 506?
Prior to the passage of the JOBS Act, Rule 506 of SEC Regulation D allowed issuers to raise an unlimited amount of capital through a private offering to an unlimited number of accredited investors and up to 35 non-accredited investors. The SEC defines an accredited investor as one with a net worth over $1 million (excluding the investor’s primary residence) or more than $200,000 in annual income ($300,000 for couples). Companies were prohibited from using general solicitation or general advertising to market their securities.
The pre-JOBS version of Rule 506 has been maintained in its entirety as Rule 506(b). Issuers wishing to conduct a private offering to a mix of accredited investors and up to 35 non-accredited investors may still do so, provided that they do not use general solicitation to advertise the offering.
What is Rule 506(c)?
The JOBS Act directed the SEC to lift the ban on general solicitation for offerings conducted under Rule 506, provided that issuers A.) sell securities only to accredited investors and B.) take reasonable steps to verify that all purchasers in an offering are accredited. The SEC finalized these reforms at its open meeting in July by creating a new Rule 506(c) that allows general solicitation in offerings to accredited investors. The finalized rules took effect on September 23.
As specified in the statute, issuers conducting Rule 506(c) offerings can now advertise to the general public, subject to certain conditions. This is a significant change from Rule 506(b), which prohibits general solicitation entirely. Though there are no specified limits on the reach of general solicitation under Rule 506(c), only accredited investors are permitted to purchase in an offering. The issuer must also take reasonable steps to verify that each investor in the offering is accredited. Other relevant SEC requirements or legal provisions may also apply.
The SEC amended Form D, which is filed in conjunction with Rule 506 offerings, to add a checkbox for issuers to indicate whether they are relying on the new Rule 506(c) exemption and conducting general solicitation.
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