Although greatly anticipated, rulemaking to lift the longstanding ban on advertising private offerings has been met with a tepid response. The hesitancy of issuers to use the new exemption likely stems from concerns they have with verifying accredited investors, says Keith Higgins, director of the Securities and Exchange Commission's Division of Corporation Finance

Speaking before the annual Angel Capital Association Summit this week, he addressed the JOBS Act's elimination of the prohibition against general solicitation and advertising in Rule 506 private offerings. Lifting the ban, in place since the early days of the Securities Act of 1933, was “a watershed moment” for companies desiring to communicate more freely and broadly about their private securities offerings, Higgins said.  

In July 2013, the SEC completed rulemaking to create a new exemption, Rule 506(c), that permits general solicitation as long as two conditions are met. Securities can be sold only to accredited investors and the issuer must take “reasonable steps to verify” the purchaser's accredited investor status. Since the exemption became available in September 2013, nearly 900 new offerings were conducted in reliance on it, raising more than $10 billion in new capital as of the end of March.

However, the use of this new exemption “still pales in comparison to the use of the old Rule 506 exemption,” Higgins said. During the same time period, the traditional exemption was used in over 9,200 new offerings and the sale of more than $233 billion in securities. “One wonders why the new exemption has not caught on more widely with issuers who have long clamored for the general solicitation ban to be lifted,” he said, calling it a “somewhat surprising turn of events.”

One explanation is that the requirement to verify accredited investor status “drives away potential purchasers who are interested in making an investment, but wary of turning over financially sensitive information, such as tax returns or brokerage statements, to the issuer for verification,” Higgins said. Those under the impression that the rule requires investors produce tax returns or brokerage statements in all circumstances are wrong, he explained. While purchasers can provide written documentation of annual income or net worth, another method  is “principles-based verification.” As detailed in the rulemaking, issuers can use discretion to determine what information forms a reasonable assessment.

The principles-based method is intended to provide flexibility and avoid a “one size fits all” approach, Higgins said. The SEC also envisions a role for third parties that would enter the business of verifying accredited investors on behalf of issuers. “It is ironic this list of verification methods is being viewed by some as the primary way to verify a purchaser's accredited investor status when, in fact, the Commission originally proposed the principles-based approach as the way issuers would comply with the rule's verification requirement and added the list of specific verification methods only in response to the concerns of commenters who wanted more certainty,” he added.

His staff has fielded numerous inquiries about whether it will provide guidance – presumably on a case-by-case basis – confirming that a specified verification method constitutes “reasonable steps,” Higgins said, but that "seems somewhat contrary to the very purpose of a principles-based rule." The SEC “will not be quick to second guess decisions” that issuers and their advisers make in good faith and appear to be reasonable," he assured the audience.

Contrary to “erroneous impressions,” the rulemaking has not changed any notions of what constitutes a general solicitation, Higgins explained. Among the incorrect assumptions are that the SEC broadened the definition and activities such as “venture fairs” and “demo days” are now prohibited. “In a funny way, it was probably easier when general solicitation was simply impermissible in all instances,” he said, explaining that the SEC's past no-action letters on specific activities may "warrant a fresh review and possible update."

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