Jonathan Adler, Stacey Song, and Jessica Forbes are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum authored by Mr. Adler, Ms. Song, Ms. Forbes, and Joanna Rosenberg.
On March 4, 2020, the Securities and Exchange Commission (the “SEC”) proposed amendments to certain rules under the Securities Act of 1933, as amended (“Securities Act”) that are intended to, among other things, address gaps and complexities in the exempt offering framework that may impede access to investment opportunities for investors and capital for issuers. The proposed amendments would impact numerous types of exempt offerings, including offerings conducted under Regulation D and Regulation S. We highlight below the amendments that may be of particular interest to our clients that regularly conduct offerings under those exemptions. Comments to the proposal are due within 60 days of publication of the Proposing Release in the Federal Register.
Background
Regulation D is a series of rules that provides three exemptions from the registration requirements of the Securities Act. Rule 506(b) of Regulation D is a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act pursuant to which an issuer may offer and sell an unlimited amount of securities, provided that offers are made without the use of general solicitation or general advertising and sales are made only to accredited investors and up to 35 non-accredited investors who meet an investment sophistication standard. A second non-exclusive safe harbor, Rule 506(c) of Regulation D, is substantially the same as Rule 506(b) except that (1) offers may be made through general solicitation or general advertising and (2) all purchasers in the offering must be accredited investors and the issuer must take reasonable steps to verify their accredited investor status. Rule 506(c) provides a principles-based method for verification of accredited investor status, as well as a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking to satisfy the verification requirement with respect to natural persons. Offerings under both Rule 506(b) and Rule 506(c) must satisfy a number of other terms and conditions set forth in Regulation D, including the requirements in Rule 502(a) regarding integration (discussed below).