SEC Proposes JOBS Act Rule Easing Private-Offering Promotion

The proposed rules would require an issuer that uses general solicitation to “take reasonable steps to verify” that all of the purchasers are accredited investors, the SEC explains.

“Whether the steps taken are reasonable would be an objective determination, based on the particular facts and circumstances of each offering and investor,” Schapiro said. The proposing release explains how this framework would operate.

“I hope that we will receive comment on this aspect of the proposal most particularly, as it is clear from the statute that taking reasonable steps to verify accredited investor status is part and parcel of permitting general solicitation,” Schapiro continued. “The comments we receive will enable the commission to have the benefit of the views expressed by issuers, investors and other market participants on the proposal before the rules are finalized.”

Schapiro said that while she believes “it will be incredibly important for the commission to take a thorough look at the private placement market in the future, I think at this point it is appropriate that we undertake this more narrow mandate that Congress placed upon us through the JOBS Act.”

Regulation D Changes

Schapiro also noted the “significant change” taking place in the private offering landscape as a result of legislative changes, which will be important for the SEC to consider as it reviews Regulation D—of which Rule 506 is a part—which spells out conditions for selling securities without registering them with the SEC.

The legislative changes range from who can invest, to who can use the registration exemption, to how the offerings are conducted, to the consequences of completing private offerings, Schapiro said.

For instance, the Dodd-Frank Act changed the accredited investor net worth test for Regulation D offerings by eliminating the investor’s primary residence from the calculation. “That same provision prohibits [the SEC] from changing the net worth test before July 2014,” Schapiro said.

Dodd-Frank also addresses the process for how the SEC determines who is an accredited investor under its rules, Schapiro continued, and “directs us to undertake a review of the definition as it relates to natural persons in its ‘entirety’ beginning four years after the enactment of the Dodd-Frank Act to determine whether the definition should be adjusted.”