On July 10, 2013, the SEC issued proposed rules to amend Regulation D. The rules, if adopted, would place significant conditions on the use of new Rule 506(c) promulgated under the JOBS Act.
Rule 506(c), as will be in effect on September 23, 2013, will allow the use of general solicitation and general advertising in unregistered offerings so long as the investors are accredited and the issuer has adequate procedures in place to ensure that the investors are accredited.
The proposed amendments would require:
- the filing of a Form D in a Rule 506(c) offering involving general solicitation and advertising before the issuer engages in general solicitation;
- the filing of a closing amendment to Form D after the termination of any Rule 506 offering;
- written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures;
- the submission to the SEC, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the SEC.
The proposed rules would also disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering. The proposed amendments would also require an issuer to include additional information in Form D about offerings conducted in reliance on Regulation D.
It took a little bit of time to not only wade through the 186 page release, but to analyze and evaluate the impact of what on the surface appeared to be well intentioned rules – whose apparent necessity was buttressed by the need to monitor what by any measure are dramatic changes to federal securities laws – allowing general solicitation and advertising in private placements. Having now done so, I concur with the views expressed by SEC Commissioner Troy Paredes insofar as it affects small businesses, which he placed on the record at the SEC’s July 10, 2013 meeting, in voting against the proposed rule:
“It seems undeniable that the proposal, if it ultimately were adopted, would thwart private offerings as an efficient means of raising capital. This would be to our collective detriment. The harm is real when entrepreneurs cannot raise the capital it takes to build an aspiration into a business and when small businesses are forced to scale back or abandon their plans for growth because they do not have the funds to move forward.”
As required by law, the SEC is soliciting comments from the public on the proposed rules. The comment period expires on September 23, 2013.
On August 28, 2013, I submitted a comment letter to the SEC to formally voice my concerns regarding the impact of the proposed rules on small businesses. The letter is available on the SEC’s website. https://www.sec.gov/comments/s7-06-13/s70613-312.pdf. I also shared my concerns with others, including the Small Business Administration Office of Advocacy, which has statutory standing to comment on regulations under the Regulatory Flexibility Act of 1980. On September 12, 2013, the Office of Advocacy issued its comment letter to the SEC, supporting some of the concerns that I expressed to the SEC on August 28, most notably that the Commission’s evaluation of the impact on small businesses is deficient under the Regulatory Flexibility Act of 1980, and requesting that part of the SEC’s proposed rule be re-issued in conformity with the RFA. https://www.sec.gov/comments/s7-06-13/s70613-339.pdf
The proposed rules, if adopted, would likely undermine the benefits that small businesses hoped to attain when the JOBS Act was adopted in April 2012. Therefore, I strongly urge my colleagues, clients and readers to submit their views to the SEC before the comment period expires on September 23, 2013.
About the Author – Samuel S. Guzik is a corporate and securities attorney and business advisor admitted to practice before the SEC and in New York and California, with over 30 years of experience. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies. For additional information regarding Mr. Guzik and his firm, Guzik & Associates, please visit his website at www.guziklaw.com