newyork1.jpg

The SEC lifts the ban on General Solicitation

The Securities and Exchange Commission (“SEC”) voted yesterday to eliminate the ban on general solicitation and advertising for offerings conducted under Rule 506 of Regulation D. Private investment funds can now offer their securities freely and solicit investors with no restriction provided that they:

  • take reasonable steps to verify that the investors are accredited investors; and

  • all purchasers of their securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the fund reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

This means that although offers of fund interests will be unrestricted by private funds that will engage in general solicitation, sales of those interests will be restricted to accredited investors only and will be subject to the new verification requirement regarding accreditation.

Note that the verification requirement is separate and independent from the requirement that all sales be limited to accredited investors. In other words, the verification requirement must be satisfied even if all investors happen to be accredited. The new verification requirement was the subject of several comment letters addressed to the SEC. Commenters requested that the SEC give more guidance related to what funds should do to verify the status of their investors. Although the SEC reiterated that the appropriate steps depend on the particular circumstances of the offering, it did provide a non-exclusive list of four verification methods that would be deemed sufficient for checking the status of natural persons (no list was given for entity investors). The four verification methods are:

  • Review of IRS tax forms reporting income such as W-2s, Form 1040 and Schedule K-1s;

  • Review of assets and liabilities. For asset review, a fund can use bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties. For liabilities, a fund should review a consumer report (also known as a credit report) from at least one of the nation-wide consumer reporting agencies and also obtain a written representation from the investor that all liabilities necessary to make a determination of net worth have been disclosed;

  • Written confirmation from a registered broker-dealer, a SEC-registered investment adviser, a licensed attorney, or a certified public accountant that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor;

  • With respect to pre-existing investors in the fund (i.e. for natural persons who invested prior to the recent amendments), a self-certification by the person at the time of sale that he or she qualifies as an accredited investor.

It is important to note that the ability of issuers to conduct Rule 506 offerings under the existing regime has been preserved under the final rule.   Accordingly, funds that opt to offer their interests without recourse to general solicitation or advertising need not comply with the requirement to take “reasonable steps” to verify the financial status of purchasers as accredited investors and can continue to privately offer securities to up to 35 non-accredited investors (in addition to an unlimited number of accredited investors). Funds may wish, for instance, to avoid general solicitation and retain the ability to offer to 35 non-accredited investors in order to offer their interests to their own employees who do not meet the accredited investor standard. Retaining the ability to offer without general solicitation may also be beneficial for funds that offer their interests to investors with whom they have a pre-existing relationship. Another reason fund managers may wish to offer securities without general solicitation would be in order to continue relying on CFTC exemption 4.13(a)(3) which allows commodity pool operators to avoid registration if they trade a de minimis amount of commodity interests provided that the “interests in the pool are offered and sold without marketing to the public in the United States” (which requirement appears to preclude general solicitation).

When filing their Form D, funds should from now on indicate whether they wish to engage in general solicitation and conduct an offering under new Rule 506(c) or conduct an offering without general solicitation pursuant to the old regime under Rule 506(b). Funds already in existence should amend their Form D to report their chosen manner of offering and should also adopt promptly new policies and procedures in their compliance manuals to reflect the new rules.

Please note that the amended Rule 506 affects only Rule 506 offerings and not Section 4(a)(2) offerings in general. Thus, even after the effective date of amended Rule 506, a fund relying on Section 4(a)(2) outside of the Rule 506 exemption will be restricted in its ability to make public communications to solicit investors for its offering because public advertising will continue to be incompatible with a claim of exemption under Section 4(a)(2).

Note also that the SEC adopted yesterday a second rule that disqualifies funds from participating in a rule 506 offering if felons and other “bad actors” participate in the offering. In addition, the SEC adopted yesterday a rule proposal which aims at improving the information provided by issuers engaging in general solicitation in order to avoid fraudulent activity and manipulation of investors.

The two new rules can be found here (Final Rule — Lifting General Solicitation Ban & Final Rule — Disqualification of Bad Actors) and the new proposal can be found here (Rule Proposal — Regulation D Amendments). The new rules will become effective 60 days after their publication in the Federal Register. We will analyze the rules and the proposal further, but please contact us if you have with any questions in the meantime.

Newsletter

Get the latest compliance news and insights - delivered weekly. The SEC3 Communique covers all compliance topics. CCO3 focuses on CCO topics.
tip: check both to keep informed!

Communiques

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Pr…

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

The final week of June was a busy one for SEC releases following the SEC’s June 28th open meeting. Among these was a revisit of Rule 22e-4 under the Investment... read more »

More SEC Settlements - This Time Form PF Filing Deficiencies

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through... read more »

Two Recent Enforcement Actions Against Private Fund Advisers

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar... read more »

2018 - Are you ready for your next SEC exam?

The pool of registered investment advisers that will be subject to an SEC exam in 2018 is at the highest level seen in years. The SEC projects it will examine... read more »

Navigating the Changes to Form ADV

On August 25, 2016, the U.S. Securities and Exchange Commission adopted numerous substantive and technical amendments to Form ADV. While the adopting release required advisers to begin complying with the... read more »

Events

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...

Chief Compliance Officer Roundtable: Breakfast Briefing

When: October 20, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Thomas Westle and Janaya...