SEC proposes eliminating solicitation and advertising prohibitions in private placements

September 12, 2012

On August 29, the U.S. Securities and Exchange Commission (SEC) proposed amendments to current rules that would provide an exemption to the prohibitions on general solicitation and general advertising in cases of offerings on a registration exempt basis under Regulation D and Rule 144A.

Under current rules, companies looking to sell securities to raise capital must either register the offering or rely on an exemption. Most registration exemptions, however, prohibit companies from engaging in general solicitation or general advertising in connection with the offering.

The proposal, part of the rulemaking required under the JOBS Act enacted earlier this year, would amend Rule 506 of Regulation D, which governs private placements, to permit companies to use general solicitation and general advertising to offer securities provided that the purchasers are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Meanwhile, Rule 144A, which provides an exemption for resales of certain restricted securities to qualified institutional buyers, would be amended to provide that securities sold pursuant to the rule may be offered to persons other than QIBs, provided that the securities are sold only to persons that the seller and any person acting on the seller's behalf reasonably believe are QIBs.

According to the SEC Chairman Mary Schapiro, the proposed rules "fulfill Congress's clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings."

The proposed rules are the latest in the SEC's moves to implement rules consistent with the JOBS Act. As we've previously discussed, the Act's provisions respecting emerging growth companies apply to foreign private issuers and, thus, the changes would potentially affect Canadian companies looking to raise capital in the U.S. Meanwhile, the CSA and OSC continue to review exemptions concerning private placements in Canada.

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