SEC Approves Jobs Act Requirement Removing General Solicitation Ban; EB-5 Impact to Follow
By: Nataliya Binshteyn
On July 10, 2013, the U.S. Securities and Exchange Commission (SEC) adopted a new rule to implement a Jumpstart Our Business Startups (JOBS) Act requirement that would eliminate the ban on general solicitation and general advertising for certain types of private securities offerings. The SEC also adopted rules disqualifying felons and other bad actors from particular kinds of securities offerings, as required under the Dodd-Frank Act.
Under the current model, companies seeking to raise capital through the sale of securities are required to register their offering with the SEC or avail themselves of registration exemptions, most of which prohibit general solicitation or general advertising in connection with securities offerings. The most common exemption of this kind is Rule 506, which permits issuers to raise unlimited capital from an unlimited number of “accredited investors” and a maximum of 35 non-accredited investors.
In conjunction with the new scheme removing the ban on general solicitation, the SEC has approved a proposal designed to enhance the agency’s ability to evaluate the evolution of market practices in Rule 506 offerings and provide safeguards to address changes in market behavior. Specifically, the SEC’s proposal will require issuers to file an advance notice of sale 15 days prior to and at the conclusion of an offering; provide additional information about the issuer and offering, including investor details, use of proceeds, and methods for verifying accredited investor status; and include legends and disclosures in written solicitation materials. The proposal would also disqualify issuers who fail to file Form D, require issuers to submit written general solicitation materials to the SEC through an intake page on the agency’s website, and extend Rule 156 guidance on potentially fraudulent or misleading statements to all private funds regardless of their participation in general solicitation activities. The proposal is currently subject to a 60-day public comment period.
The new rule is expected to significantly impact EB-5 investment practices by allowing sponsors of EB-5 pooled investment vehicles to engage investors via general solicitation and advertise private offerings under certain terms and conditions. To read Kate Kalmykov's recent blog post on the JOBS Act, please click here.