Revisions to SEC Rule 506 Permitting General Solicitation Effective September 23, 2013

On September 23, 2013, the Securities and Exchange Commission (SEC) rules permitting general solicitation and advertising of private securities offerings pursuant to the Jumpstart Our Business Startups Act of 2012 (JOBS Act) went into effect. Under the new Rule 506(c) of the SEC’s Regulation D, a company offering preferred stock, convertible notes or other securities to investors in a private offering may solicit and advertise that offering to the general public, provided that:

•  the company only sells the securities to “accredited investors,” as defined by the SEC;
•  the company takes reasonable steps to verify that all those purchasers meet the SEC’s accredited investor requirements; and
•  the offering meets the other applicable requirements of Rule 506.

The changes to Rule 506 also include the less publicized yet important addition of a “bad actor” disqualification pursuant to the Dodd–Frank Wall Street Reform and Consumer Protection Act.

The pre-existing Rule 506 exemption remains as new Rule 506(b) and, although there is now a private offering exemption that permits general solicitation, there is no change to the law governing what constitutes a general solicitation.

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