Proposed Rules Eliminating the Prohibition Against General Solicitation and Advertising in Rules 506 and 144A Offerings – Part II
As required by Title II of the JOBS Act, the SEC has published proposed rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings. In a move that is widely supported by legal practitioners, including the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association, the SEC has proposed simple modifications to Regulation D and Rule 144A mirroring the JOBS Act requirement. The entire text of the rule release is available on the SEC website.
This Part II discussed the proposed amendments to Rule 144A.
Title II of the JOBS Act, requires the SEC to amend Rule 144A to permit general solicitation and advertising in offerings under Rule 506, provided that all purchasers of the securities are qualified institutional buyers (QIB). The JOBS Act requires that the rules require the issuer to take reasonable steps to verify that purchasers of the securities are QIB’s, using such methods as determined by the SEC. Most of the pre-rulemaking comments and commentary by the public and advocacy groups, centered on what steps and methods would be required by the SEC to verify purchaser qualification.
Presently, Rule 144A does not explicitly prohibit general solicitation and advertising but it does limit all offers of securities to QIB’s, which has the same practical effect. Section 5 of the Securities Act of 1933 (the registration requirement) as well as most of the exemptions and safe harbor exemptions regulate both the offers and sales of securities. As further brief background on Rule 144A, it is noted that technically Rule 144A is not an Issuer’s exemption, but rather is a safe harbor for the resale of restricted securities to QIB’s, much as Rule 144 is a safe harbor for the resale of restricted securities generally. However, since its passage in 1990, market participants have used Rule 144A as a means of raising capital for issuers by engaging in a Regulation S offering followed by the immediate re-sale of such securities to QIB’s in reliance on Rule 144A. This method of capital raise has become widely known as a Rule 144A Offering.
Amendment to Rule 144A
The JOBS Act directs the SEC to revise Rule 144A to provide that securities may be offered to persons other than QIBs, including by means of general solicitation and advertising, provided that securities are only sold to persons that the seller reasonably believes is a QIB. Taking the most direct and simplest route, the SEC has proposed to simply remove the terms “offer” and “offeree” to the existing Rule 144A such only sales are limited to QIB’s. As Rule 144A does not prohibit general solicitation, open offers have the effect of allowing such general solicitation.
Integration with Offshore Offerings
Regulation S provides a safe harbor for offers and sales of securities outside the United States. A condition to Regulation S is that there can be no directed selling efforts in the United States. Many practitioners have been concerned that the new general solicitation rules would de facto eliminate the ability to engage in concurrent Rule 144A or 506 and Regulation S offerings. However, the SEC notes that Regulation S, by its terms, does not integrate with either registered or “domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act.” Since general solicitation under the new Rule 506(c) or Rule 144A would satisfy the requirements of a US exemption, the SEC will not view concurrent offerings under Rule 506(c) and/or Rule 144A and Regulation S as integrating such as to destroy the Regulation S exemption.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.
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