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SEC Issues New C&DIs Related to Rules 506(c) and 144A

Yesterday the Securities and Exchange Commission’s Division of Corporation Finance issued nine new Compliance and Disclosure Interpretations (C&DIs) related to the private offering exemption afforded by Rule 506(c) and two new C&DIs related to the private resale exemption afforded by Rule 144A.

The Rule 506(c) C&DIs in summary:

  • If, prior to the September 23, 2013 effective date of new Rule 506(c), an issuer commenced an offering in reliance on what was formerly Rule 506 (now Rule 506(b)), and that issuer now wishes to continue the same offering under Rule 506(c) (following the transition guidance in the final rules’ adopting release), then the issuer must file an amendment to its previously filed Form D and check the box indicating that is now relying on the exemption afforded by Rule 506(c). However, an issuer needn’t file a Form D amendment if it is simply continuing to rely on what was formerly Rule 506 (now Rule 506(b). [260.05]
  • If an issuer takes reasonable steps to verify that a purchaser is an accredited investor, and has a reasonable belief that such purchaser is an accredited investor at the time of the sale of its securities, but then later discovers that the purchaser did not meet the criteria for any category of accredited investor, the issuer will not lose its ability to rely on Rule 506(c) for the offering. [260.06]
  • If an issuer intends to conduct an offering under Rule 506(c) it must satisfy the reasonable steps to verify requirement even if all of the purchasers happen to be accredited investors; the verification requirement is separate from and independent of the requirement that sales be limited to accredited investors. [260.07]
  • If an issuer chooses to verify the accredited investor status of a purchaser using the non-exclusive net worth verification method and reviews the relevant documentation dated within the required prior three months, but by the time the purchaser decides to purchase securities in the offering the previously submitted documentation is no longer dated within the prior three months, then the issuer can not rely on the previously submitted documentation to satisfy the net worth verification method. The issuer may, however, determine it has taken reasonable steps to verify the purchaser’s accredited investor status under the principles-based method of verification. [260.08]
  • The  non-exclusive third-party verification method may be satisfied by written confirmation from an attorney or certified public accountant licensed or duly registered, as the case may be, in good standing in a foreign jurisdiction. [260.09]
  • The non-exclusive verification method for existing investors will not apply to new issuers that have the same sponsor as an issuer in which the investors purchased securities in a prior Rule 506(b) offering (e.g., a new limited partnership organized by a general partner where the investors purchased securities of a prior limited partnership sponsored by the same general partner). Rather the method is limited to verification of existing investors who purchased securities in the same issuer’s Rule 506(b) offering as accredited investors prior to September 23, 2013 and who continue to hold such securities. [260.10]
  • An issuer that commences an offering intending to rely on Rule 506(c) but does not engage in any form of general solicitation may subsequently rely on Rule 506(b) for the offering, provided the conditions of Rule 506(b) are satisfied with respect to all sales of securities that have occurred and the issuer amends any previously filed Form D to check the box indicating that it is now relying on the exemption afforded by Rule 506(b). [260.11]
  • Similarly, an issuer that commences an offering intending to rely on Rule 506(b) may subsequently rely on Rule 506(c) for the offering, provided the conditions of Rule 506(c) are satisfied with respect to all sales of securities in the offering and the issuer amends any previously filed Form D to check the box indicating that it is now relying on the exemption afforded by Rule 506(c). [260.12]
  • If the conditions of Rule 506(c) are not met in a purported Rule 506(c) offering and the issuer has engaged in general solicitation, then the issuer will not be able to claim the private offering exemption under Securities Act Section 4(a)(2). [260.13]

The Rule 144A C&DIs in summary:

  • In Rule 144A offerings in which securities are initially sold by an issuer to financial intermediaries in transactions exempt under Securities Act Section 4(a)(2) or Regulation S, the general solicitation may be conducted by the issuer as well as by the initial purchasers and other distribution participants. [138.03]
  • The amendments to Rule 144A permitting the use of general solicitation do not change how directed selling efforts under Regulation S are analyzed in concurrent Rule 144A and Regulation S offerings. [138.04]
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