On November 13, the Securities and Exchange Commission’s Division of Corporation Finance issued two new Compliance and Disclosure Interpretations (C&DIs) on Rule 144A under the Securities Act of 1933 (Securities Act) and nine new C&DIs on Rule 506 under the Securities Act. These C&DIs relate to the new rules adopted by the SEC in July that lifted the decades-old ban on general solicitation and advertising in connection with private securities offerings conducted in reliance upon the exemptions from registration provided by Rules 144A and 506. The new C&DIs include the following interpretive guidance:

  • C&DI 138.03 provides that, in offerings under Securities Act Rule 144A in which securities were initially sold to financial intermediaries in exempt transactions under Securities Act Section 4(a)(2) or Regulation S, general solicitation may be conducted by the issuer as well as the initial purchasers involved in such exempt transactions and other distribution participants.
  • C&DI 138.04 clarifies that the amendments to Rule 144A permitting the use of general solicitation did not change how directed selling efforts under Regulation S are analyzed in concurrent Rule 144A and Regulation S offerings.
  • C&DI 260.05 provides that, if an issuer commenced an offering in reliance on Rule 506 prior to the effective date of the new Rule 506(c) exemption and filed a Form D notice for such offering, and if the issuer continues its offering in reliance on the Rule 506(c) exemption, it will be required to amend its Form D to reflect this change.
  • C&DI 260.06 clarifies that an issuer will not lose the ability to rely on Rule 506(c) for an offering if securities are purchased in the offering by a person who is not an accredited investor as long as the issuer took reasonable steps to verify that such purchaser was an accredited investor and reasonably believed that such purchaser was an accredited investor at the time of the sale.
  • C&DI 260.07 clarifies that, even if all purchasers in an offering are accredited investors, if the issuer failed to take reasonable steps to verify the accredited investor status of the purchasers, the issuer cannot rely on the Rule 506(c) exemption.
  • C&DI 260.08 clarifies that, if an issuer relies on one of the specific, non-exclusive verification methods in Rule 506(c) to verify the accredited investor status of a purchaser in an offering, it must satisfy the specific requirements of the method on which it relies. However, if the issuer is not able to satisfy these requirements to rely on one of these methods, it may instead determine whether it has taken reasonable steps to verify the purchaser’s accredited investor status under the principles-based approach to verification.
  • C&DI 260.09 states that the third-party verification method in the non-exclusive list of verification methods in Rule 506(c) is not limited to written confirmations from attorneys and certified public accountants who are licensed or registered in a US jurisdiction and may include such individuals who are licensed or registered in foreign jurisdictions.
  • C&DI 260.10 clarifies that the verification method for existing investors in the non-exclusive list of verification methods in Rule 506(c) is limited to existing investors that purchased securities in the same issuer’s Rule 506(b) offering as accredited investors prior to September 23, 2013, and continue to hold such securities. Specifically, even if a new issuer has the same sponsor as the issuer in which the investor purchased securities in a prior Rule 506(b) offering, it may not use this method of verification.
  • C&DI 260.11 states that an issuer that commenced an offering intending to rely on Rule 506(c) and did not engage in any form of general solicitation may subsequently determine to rely on Rule 506(b) for the offering as long as the conditions of Rule 506(b) have been satisfied.
  • C&DI 260.12 states that an issuer that commenced an offering in reliance on Rule 506(b) may determine, prior to any sales of securities, to rely on Rule 506(c), as long as the conditions of Rule 506(c) are satisfied.
  • C&DI 260.13 clarifies that, if an issuer has engaged in general solicitation in connection with an offering but fails to satisfy the conditions of Rule 506(c), the Securities Act Section 4(a)(2) private offering exemption will not be available to the issuer with respect to such offering.