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General Solicitation and “Bad Actor” Changes Went Into Effect on September 23, 2013

27 Sep '13

The changes adopted by the Securities and Exchange Commission (“SEC”) to Regulation D and Rule 144A on July 10, 2013, addressing general solicitation, new filing requirements and “bad actor” disqualification events (among others) applicable to Rule 506 offerings, went into effect on September 23, 2013.

Specifically, an issuer, including a private fund, is now permitted to engage in general solicitation and advertising in a private offering under new Rule 506(c), provided that the securities are sold to only accredited investors and that the issuer takes reasonable steps to verify that all purchasers are accredited investors. The SEC amended Form D to add a separate box that an issuer must check if it is relying on new Rule 506(c). The SEC also amended Rule 144A under the Securities Act to permit a person reselling securities under Rule 144A to engage in general solicitation and advertising, provided that the securities are sold to only qualified institutional buyers.

In addition, new Rule 506(d) prohibits an issuer from relying on Rule 506 if the issuer or certain of its affiliates (including beneficial owners of 20 percent or more of the issuer’s outstanding voting equity) have been convicted of or are subject to court or administrative sanctions for having violated specified laws that occur after September 23, 2013. Prior convictions and administrative sanctions will not disqualify reliance on Rule 506 if disclosed to offerees prior to the offering. These provisions will require issuers to modify their standard subscription documents in order to censure compliance.

Attorneys should familiarize themselves with the new rules, since they require that modifications be made to standard investor questionnaires and representations in placement agency and purchase agreements, and change the closing processes on all Rule 506 offerings.

Read Akin Gump’s summary of the new rules here and earlier blog post on the topic here.