As a Securities Lawyer, I want to keep you up to date on “Reg D” and securities law in general. In 2012 Congress passed the JOBS Act, which mandated the creation of a new offering exemption under the Regulation D 506 program that would allow for general advertising of an offering to accredited investors. The rules went into effect on September 23, 2013. Prior to the passage of the JOBS Act (and the subsequent promulgation of the rules) advertising of private placements was not allowed and companies selling securities (“Issuers”) were limited to soliciting people only in their personal contacts list (hence the term “rolodex round”) unless the Issuers worked through a broker/dealer firm.
506(C) GENERAL SOLICITATION IN PRIVATE OFFERINGS
The traditional 506(b) offering is still alive and well and can be used by companies to raise capital.
This new exemption is termed “506(c)” and is widely known as the “general advertising” 506 program. All terms and conditions of Rules 501 (definitions), 502(a) (integration with other offerings), and 502(d) (securities are “restricted securities” for purposes of Rule 144) must be satisfied.
The Regulation D 506(c) program will retain many of the characteristics of the current 506(b) offerings. However, there are some notable changes:
- Advertising and general solicitation of investors is allowed;
- Participating investors must be “accredited” investors per the Regulation D Rule 501 definitions;
- Accredited investors must provide proof or an approved third party verification that they meet the accredited standard for income and/or net worth (instead of just “checking a box” certifying that they are accredited like many securities attorneys interpret the 506(b) offering requirements);
- The SEC filing process will be adjusted to include a “pre-filing” of Form D with a 15-day waiting period prior to advertising being allowed for the offering.
There are some other small adjustments to execution aspects of the offering as well.
The SEC adopting release clarifies that, as required by the JOBS Act, Rule 506(c) will be treated as a “private placement” exemption even though general solicitation is permitted under the Rule; however, the statutory “private placement” exemption otherwise provided by Section 4(a)(2) of the Securities Act (commonly referred to as “Section 4(2)” before the re-codification of the Securities Act necessitated by the JOBS Act) continues to be conditioned on the absence of general solicitation. Because offerings conducted under Rule 506(c) are deemed by the JOBS Act to not involve a public offering, hedge funds, private equity funds, and similar “private” funds may sell their securities using general solicitation under Rule 506(c) without losing the ability to satisfy the exemptions from registration under the Investment Company Act that are conditioned on the fund not making a public offering of its securities.
WHEN CAN I SELL MY RESTRICTED SECURITIES?
When you acquire restricted securities or hold control securities, you must find an exemption from the SEC’s registration requirements to sell them in a public marketplace. Rule 144 allows public resale of (1) unregistered securities, which are securities directly from an issuer, referred to as “restricted” securities; and (2) unrestricted securities held by an affiliate of the issuer, referred to as “control” securities–if a number of conditions are met.
The easiest way to tell if a security is “restricted” is to look for a “restrictive” legend. If you acquire restrictive securities, you almost always will receive a certificate stamped with a “restrictive” legend–usually in red print. The legend indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from the registration requirements.
Certificates for control securities usually are not stamped with a legend.
There are five basic requirements of Rule 144, although not all requirements apply to every sale, as discussed below:
- Current public information. Specified current information concerning the issuer must be publicly available. See “Rule 144(c) – Current Public Information Requirement.”
- Holding period. A six-month holding period is required for “restricted securities” of an issuer that has been a reporting company for at least 90 days. A one-year holding period is required for “restricted securities” of a non-reporting company.
- Volume limitation. The amount of securities that can be sold in any three-month period for listed companies is limited to the greater of (i) one percent of the shares or other units of that class outstanding, or (ii) the average weekly trading volume during the four calendar weeks preceding the filing of a Form 144, or if no such notice is required, the date of receipt of the order to execute the transaction. The amount of securities that can be sold in any three-month period for companies with over-the-counter, or OTC, securities is limited to one percent of the shares or other units of that class outstanding. See “Rule 144(e) – Limitation on Amount of Securities Sold.” Rule 144 also has an alternative volume limit of up to 10% of the tranche (or class) outstanding for debt securities.
- Manner of sale. Equity securities (but not debt securities) must be sold in unsolicited “brokers’ transactions,” directly to “market makers,” or in “riskless principal transactions.” See “Rule 144(f) and (g) – Manner of Sale Requirements.”
- Notice of sale. The seller must file a Form 144 with the SEC at the time the sell order is placed with the broker if the seller is an affiliate and intends to sell during any three-month period more than 5,000 shares or securities with a value in excess of $50,000. See Rule 144(h).
SEC ANNOUNCES WHISTLEBLOWER AWARD OF MORE THAN $325,000
The Securities and Exchange Commission announced a whistleblower award totaling more than $325,000 for a former investment firm employee who tipped the agency with specific information that enabled enforcement staff to open an investigation and uncover the extent of the fraudulent activity.
The whistleblower provided a detailed description of the misconduct and specifically identified individuals behind the wrongdoing to help the SEC bring a successful enforcement action. The whistleblower waited until after leaving the firm to come forward to the SEC, however, and agency officials say the award could have been higher had this whistleblower not hesitated.
“Corporate insiders who become aware of securities law violations are encouraged to come forward without delay in order to prevent misconduct from continuing unabated while investors suffer more harm,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “Whistleblowers are afforded significant incentives and protections under the Dodd-Frank Act and the SEC’s whistleblower program so they can feel secure about doing the right thing and immediately reporting an ongoing fraud rather than letting time pass.”
Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, added, “This award recognizes the value of the information and assistance provided by the whistleblower while underscoring the need for whistleblowers to report information to the agency expeditiously.”
Since its inception in 2011, the SEC’s whistleblower program has paid more than $54 million to 22 whistleblowers who provided the SEC with unique and useful information that contributed to a successful enforcement action. Whistleblowers are eligible for awards that can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards.
By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
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