SEC Issues 11 C&DIs On Rule 144A and Rule 506(c)

Securities and Exchange Commission

Securities and Exchange Commission

By Nilene Evans on November 14th, 2013 – On November 13, 2013, the SEC issued 11 new Compliance & Disclosure Interpretations regarding Rule 144A and Rule 506(c). As with previous C&DIs, many of the new ones confirm positions that the SEC has already taken in other statements, but it is very beneficial to gather these positions in one place. [click here]  The two new Rule 144A C&DIs confirm that initial purchasers as well as issuers may engage in general solicitation and that, as provided in the adopting release, Rule 144A general solicitation does not change how directed selling efforts under Regulation S are analyzed.  The nine new Rule 506(c) C&DIs address:

  • Filing requirements for a Form D for a Rule 506(b) offering commenced before September 23, 2013, the effective date for the new Rule 506(c) exemption, when the issuer proposes to change to a Rule 506(c) offering;
  • Issues surrounding reasonable steps to verify accredited investor status, including:
    • the issuer can still sell to an investor if the issuer took reasonable steps to determine accredited investor status and had a reasonable belief that the investor was an accredited investor and afterwards discovers that the investor was not an accredited investor at the time of sale;
    • the inability to rely on Rule 506(c) if the issuer does not take reasonable steps to verify accredited investor status even if all the investors were in fact accredited investors;
    • the documentation for the net worth verification method must be as of a date within three months prior to the time of sale of the securities;
    • the third party verification method may include written verifications from non-U.S. registered or licensed attorneys and certified public accountants;
    • the verification method for existing investors is limited, by its terms, to existing investors who purchased securities in the same issuer’s Rule 506(b) offering prior to September 23, 2013, as opposed to two different issuers with a sponsor in common – this will be a particular hardship for funds and other entities that have families of issuers;
  • The ability to switch from a Rule 506(b) offering to a Rule 506(c) offering, and vice versa, so long as the conditions of the applicable rule are satisfied; and
  • The ability to switch from a Rule 506(c) offering to a Section 4(a)(2) offering is limited to those situations where there has not been any general solicitation.



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