Preliminary Take on Proposed Rule on Reg D Advertising

On August 29, 2012, the SEC issued proposed rules in response to the JOBS Act requirement to loosen the Reg D proscription against general solicitation securities offerings under the regulations. Section 201(a) of the JOBS Act permits advertising and general solicitation in Reg D offerings so long as all investors are accredited investors.  It also requires the Commission to issue rules as to the steps sponsors need to take to verify that each investor satisfies with the accredited investor standards.  Curiously, the Act does not expressly include a reasonable belief standard leading some commentators to fear that a sponsor would be held strictly liable if an investor misrepresented its status in order to invest in the offering.  Under the proposed rules, one clear win for the sponsors trying to raise money is the Commission’s position that the lack of "reasonable belief" language in Section 201(a) of the JOBS Act does not mean that sponsors will be held strictly liable for a non-qualifying investor so long as the sponsor took reasonable steps to verify the investor’s status.

The Commission has not, however, given much guidance as to what constitutes reasonable steps to verify an investor's qualification as an accredited investor and has left the determination to the sponsor after taking into account the type of purchaser (e.g., individual vs. a pension plan), the information about the investor known to the sponsor and the terms of the offering including the minimum investment amount.

One thing is certain: under the proposed new rule, the Commission will not accept mere self certification by way of the typical investor questionnaire routinely used in the past.

The proposed rule is set up as an alternative to Rule 506 so that sponsors not using advertising or general solicitation to obtain investors need not comply with the stricter verification rule.

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