Today the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 506 of Regulation D (“Rule 506”) under the Securities Act of 1933, as amended (the “Securities Act”) to (i) eliminate the ban on general solicitation and advertising for certain private offerings, as mandated by the Jumpstart Our Business Startups Act and (ii) disqualify securities offerings involving certain “felons and other ‘bad actors'” from reliance on Rule 506 as mandated by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC also proposed certain other amendments to Regulation D, Form D and Rule 156 of the Securities Act. The final rule and form amendments related to (i) and (ii) above will be effective 60 days after publication in the Federal Register (the “Effective Date”)

Elimination of the Ban on General Solicitation

The amendment to Rule 506 added new paragraph (c) which permits an issuer to engage in general solicitation or general advertising in offering and selling securities, provided that: (i) all purchasers of the securities are accredited investors, as defined under the Securities Act; and (ii) the issuer takes reasonable steps to verify that such purchasers are accredited investors. The amendment to Rule 506 also includes a non-exclusive list of methods that issuers may use to satisfy the verification requirement for purchasers who are natural persons.

Addition of “Bad Actor” Disqualifications to Rule 506

The SEC also amended Rule 506 to disqualify issuers and other market participants from relying on Rule 506 if “felons and other ‘bad actors'” are participating in the Rule 506 offering. The exemption under Rule 506 will not be available for a sale of securities if certain covered persons engage in disqualifying events. Disqualification would only apply for disqualifying events that occur after the Effective Date.

New Proposed Amendments

The SEC proposed new amendments to Regulation D and Form D which would enable the SEC to collect additional data on the effects of eliminating the ban on general solicitation and general advertising. The SEC also proposed amendments to Rule 156 under the Securities Act that would apply the rule’s anti-fraud guidance to sales literature used by private investment funds relying on Rule 506(c).

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A more detailed memorandum on these recent developments will be forthcoming.

If you have any questions regarding the changes described above, please contact an attorney in the Investment Management Group at Seward & Kissel.