Securities Regulation and Corporate Governance Monitor

Draft Registration Statements to Be Submitted and Filed on EDGAR

On September 26, 2012, the SEC’s Division of Corporation Finance announced that, beginning on Monday, October 1, 2012, Emerging Growth Companies and foreign private issuers may voluntarily submit their draft registration statements and amendments for confidential, non-public staff review using either the current secure email system or through a new EDGAR-based submission process.

ON August 29, the Securities and Exchange Commission (the “SEC” or the “Commission”) proposed rules to implement Section 201 of the Jumpstart Our Business Startups (JOBS) Act, which requires the SEC to eliminate the prohibition against general solicitation and general advertising (together, “general solicitation”) in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and Rule 144A under the Securities Act.  The comment period for the proposed rules will expire 30 days after the proposed rules are published in the Federal Register; that is, likely around the end of September.  Notably, the JOBS Act directed the Commission to issue final rules within 90 days of enactment of the JOBS Act, or by July 4, 2012, and Chairman Schapiro and Commissioners Paredes and Gallagher all expressed a desire to move expeditiously to a final rule.  As a result, commenters should submit their comments on the proposal promptly in order to ensure that the Staff and Commission have ample time to consider them before issuing a final rule.Highlights of the ProposalThe following summary of the key terms of the proposal is based upon attendance at the open meeting of the Commission, information provided in a Fact Sheet on the SEC’s website (available here) and a preliminary review of the proposing release (available at here).• Rule 506 would be amended by adding a new paragraph (c), which would allow general solicitation where the issuer takes reasonable steps to verify, and reasonably believes, that each purchaser in the offering is an accredited investor.  There are no changes to the definition of “accredited investor.”  Thus, the issuer must take reasonable steps to verify that the purchaser satisfies one of the categories of persons defined as an “accredited investor” under Rule 501(a)(1)-(8) at the time of the sale of the securities to that person.  • This means that the issuer would not lose the benefit of Rule 506(c) so long as it has taken reasonable steps to verify, and reasonably believes, that the purchaser is an accredited investor, even if a purchaser circumvents the issuer’s verification measures.• The proposed rules would not specify the methods by which an issuer must satisfy its obligation to “take reasonable steps to verify” that a purchaser is an accredited investor.  Instead, in light of the wide range of types of investors that may invest in an offering conducted pursuant to Rule 506(c), the steps that an issuer takes would be required to be reasonable under the facts and circumstances.  • The revised rules would include a non-exclusive list of factors that an issuer would consider when taking reasonable steps to verify that a purchaser is an accredited investor, including (i) the nature of the purchaser and the category of accredited investor that the purchaser claims to satisfy, (ii) the amount and type of information that is available to the issuer about the purchaser, and (iii) the nature of the offering, including the manner in which investors were solicited, and the terms of the investment, such as the minimum investment amount.• The existing exemption for offerings conducted pursuant to Rule 506 without engaging in general solicitation would remain unchanged.• Form D would be amended to include a checkbox indicating that an offering was conducted using general solicitation.  Issuers are currently required to file Form D with the SEC upon selling securities pursuant to Regulation D, although the failure to file a Form D does not result in the loss of the exemption provided by Regulation D.  Contrary to the request of some commenters, the proposed rules would not require that the issuer file the content of any solicitation or advertising with the Form D, and would not condition the availability of any exemption under Regulation D on filing the Form D.  The checkbox provision is intended to allow the Commission to monitor the use of general solicitation and to assess the impact of the changes on the market, including the effectiveness of various verification practices used by issuers.• Rule 144A would be amended to permit “offers” to persons who are not QIBs, and thus to permit general solicitation in offerings conducted pursuant to Rule 144A. Subparagraph (d)(1) would continue to condition the exemption on the securities being sold only to QIBs or to purchasers that the seller and any person acting on its behalf reasonably believe is a QIB.  The proposed amendments would not add any additional standards for whether a seller reasonably believes a purchaser to be a QIB or otherwise (note however that, unlike Rule 506, Rule 144A currently provides non-exclusive methods by which a seller may establish that an investor is a QIB).• The proposal clarified the Commission’s view that the use of general solicitation in connection with a Rule 506 or Rule 144A offering would not be a barrier to a concurrent offering by the issuer in an offshore transaction in reliance on Regulation S.We expect to issue a Client Alert on these proposed rules within a few days, following a more detailed review of the proposing release.