The SEC has long prohibited issuers selling unregistered securities from "general solicitation" of the public in attempt to sell the securities. This past week, the SEC approved a new regulation, required by the JOBS Act, which permits general solicitation and advertising for private placements under Reg D. Issuers selling under this new rule, however, may sell only to "accredited investors" -- those with incomes over $200,000 or a net worth exceeding $1 million. Under the new rule, the issuer is responsible for ensuring compliance with the limitation to accredited investors. While the new rule does not specify what the issuer must do to verify that an investor is accredited, it provides a safe harbor for the types of documents upon which the issuer can fairly rely. We expect that a number of enforcement and civil litigation issues will arise under the new rule:
- whether an issuer has complied with the accredited investor rule
- whether advertising and solicitations are false or misleading (the anti-fraud rules of the Securities Act of 1933 and Securities Exchange Act of 1934 continue to apply)
- whether unsavory characters (convicted felons and the like) are undisclosed principals behind some of the companies engaged in public solicitations
While the new rule will allow for increased fund-raising opportunities for companies, it also presents opportunities for substantial liability for the unwary. We recommend conservative use of the new rule and careful review of advertisements and solicitation documents for consistency with private placement memoranda, particularly during the early period of the implementation of the new rule which should become effective around mid-September.