Article
Article
10.06.14
Two key features of the JOBS Act – general solicitation in Rule 506 offerings, and the increased thresholds at which an issuer will be required to register a class of securities under the Securities Exchange Act of 1934 (the “1934 Act”) – when combined with certain advantages already enjoyed by issuers in Rule 506 offerings, open up an entirely new category of “publicly offered private offerings” that are largely exempt from substantive regulation at either the federal or state level, by issuers that will be able to avoid becoming public companies, for practical purposes, as long as they wish. Given the high costs and liability risks of operating as a publicly reporting company in the U.S., and the great advantages of being a Rule 506 issuer, this is a category that could prove to be very large, and very varied.
Rule 506
Rule 506 is the exemption used for more than 90 percent of all exempt offerings in the US, and more than 90 percent of all exempt offerings already are limited to accredited investors.1 Rule 506, as it had existed until the recent amendments, permitted private placements to be sold in unlimited offering amounts, to an unlimited number of purchasers (subject to the need for 1934 Act registration when an issuer has 500 holders of record), as long as all of the purchasers are accredited investors and there was no use of general solicitation or public advertising.
The JOBS Act and General Solicitation
The JOBS Act directed the SEC to remove the prohibitions on general solicitation or public advertising for securities offerings relying on Rule 506. In particular, Section 201(a)(1) of the JOBS Act directed the SEC to amend Rule 506 to permit general solicitation or public advertising, provided that the issuer has taken reasonable steps to verify that all purchasers of the securities are accredited investors. On July 10, 2013, the Commission adopted amendments to Rule 506, including a new Rule 506(c) authorizing general solicitation, to accomplish this direction (Rel. 33-9415).
The JOBS Act and 1934 Act Registration
In addition, Title V of the JOBS Act amended Section 12(g)(1)(A) of the 1934 Act to raise the thresholds at which an issuer will be required to register under section 12(g) of the 1934 Act. An issuer must register within 120 days after its first fiscal year in which the issuer has total assets in excess of $10 million and a class of equity securities (other than exempted securities) held of record by either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. For these purposes, the “held of record” definition in Section 12(g)(5) does not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the registration requirements under Section 5 of the Securities Act of 1933 (“the 1933 Act”), or securities sold in exempt crowdfunding offerings under Title III of the JOBS Act.
As a result, under amended Regulation D, an issuer may conduct a Rule 506 offering by public advertising long as all purchasers are accredited investors, and 1934 Act registration is not required until the issuer acquires 2,000 holders of record (excluding holders who acquired their shares under the Company's employee benefit plans or in exempt crowdfunding offerings).