Significant changes to rules for private securities offerings

Abstract

Purpose – The purpose of this paper is to explain changes to the SEC rules governing private offerings of securities, permitting general solicitation and general advertising in certain private placements conducted under Rule 506 of Regulation D under the US Securities Act of 1933, and amending Rule 506 to disqualify certain “bad actors” from private placements conducted under the rule. Design/methodology/approach – The paper explains the new Rule 506(c), which removes the prohibition on general solicitation and general advertising provided that all purchasers are accredited investors and the issuer has taken all reasonable steps to verify that they are accredited investors. The paper explains the final rules relating to bad-actor disqualifications, and also explains several amendments to Regulation D that the SEC has proposed to give the Commission additional insight into the market and help prevent potential fraud. Findings – In adopting these rule amendments simultaneously, the SEC balanced the often counterpoised considerations of promoting capital formation and protecting investors. Practical implications – Issuers engaging in offerings under the new Rule 506(c) must develop adequate processes to verify the accredited investor status of purchasers and to identify bad actors as defined in the rule. Originality/value – The paper provides practical guidance from experienced financial services lawyers.