The Primerus Paradigm - Fall 2012 Page 19

F A L L 2 0 1 2

Under current practice, an issuer's "rea-
sonable belief" is based upon represen-
tations made in a purchase agreement
or an investor questionnaire, generally
without further inquiry by the issuer.

changes made by the JoBS Act

Title II of the JOBS Act changes the
landscape for private offerings. Section
201 of the JOBS Act:

Requires the SEC to promulgate
regulations by July 5, 2012, that:

eliminate the prohibition of public
solicitation in Rule 506 offerings,
provided that the issuer takes
reasonable steps to verify that all
purchasers are accredited inves-
tors;

specify the methods an issuer
must use to "verify" that a pur-
chaser is an accredited investor;

eliminate the prohibition of public
solicitation in Rule 144A transac-
tions to permit public solicitation,
if all purchasers are reasonably
believed to be Qualified Institu-
tional Buyers.

Amends Section 4(2) of the Securities
Act, to provide that offers and sales
of securities under Rule 506 shall
not be deemed public offerings as
a result of general advertising or
general solicitation.

Amends Section 15(a)(1) of the
Securities and Exchange Act of
1934, to exclude from broker dealer
registration a person that maintains
a platform or mechanism for Rule
506 offerings that permits the offer,
sale, purchase or negotiation of,
or with respect to, securities, or
permits general solicitations or
general advertisements by issuers
of securities whether in person, or
online, or by any other means.

what Should I Do now?

The relaxation of the prohibition of
general solicitation in Rule 506 offerings
will not be effective until the Commis-
sion adopts new regulations.

things to think About now

If a general solicitation is made in a
Rule 506 offering, the issuer is required
to limit the purchasers of the securities
in that Rule 506 offering to accredited
investors. A few things to consider before
undertaking a Rule 506 offering with
general solicitation:

What is the effect on the offering if
securities are issued to a person that
is not an accredited investor? Would
the entire exemption be blown? If the
sale to the non-accredited investor is
rescinded, would the exemption then
exist for the accredited investors?

Is it possible to have concurrent of-
ferings one for accredited investors
with public solicitation and another
for non-accredited investors without
public solicitation?

How long would an issuer have to
wait before it can issue securities to
an investor that is not an accredited
investor?

Does a Rule 506 offering with general
solicitation limit an issuer's ability to
issue stock and options to its employ-
ees?

What will the verification require-
ments require from an issuer?

Rule 502(a)

suggests that a six-

month period would have to elapse
between the completion of a Rule 506
offering with general solicitation and the
start of another Regulation D offering
without general solicitation to unaccred-
ited investors, if during such six-month
period, there are no offers or sales of
securities by or for the issuer that are of
the same or a similar class as those of-
fered or sold under Regulation D, except
for offers or sales of securities under an
employee benefit plan.

Rule 502(a) suggests that concur-
rent offerings under Regulation D are
unlikely, however, a concurrent offering
under Regulation D with public solicita-
tion and Regulation S

(e.g. outside the

United States) may be possible under
current law.

Regulation S prohibits

"directed selling efforts."

Clarification

by the SEC that general solicitation in a
Rule 506 offering is not directed selling
efforts in a Regulation S offering would be
useful for issuers contemplating concur-
rent offerings under Regulation D with
public solicitation and Regulation S.
Rule 502(a) expressly permits the is-
suance of securities to employees during,
or after, an offering under Regulation D.
The SEC will develop regulations that
address verification standards. Commen-
tators

have urged the SEC to adopt rules

that reflect current custom and practice
and honor the purpose of the JOBS Act to
encourage and support capital formation
and to recognize the legitimate privacy
concerns of purchasers.

1 Section 4(2) of the Securities Act of 1933 prior to

amendment by the Jumpstart Our Business Startups Act,
H.R. 3606.

2 SEC v. Ralston Purina, 246 U.S. 119, 124-25 (1953).
3 Securities Act Release No. 33-4552 (Nov. 6, 1962)
4 17 C.F.R. 230.500 et. seq.
5 17 C.F.R. 230.506.
6 See Rule 502 (17 C.F.R. 230.502) for the general condi-

tions applicable to a Regulation D Offering and Rule
506 (17 C.F.R. 230.506) for the conditions specific to a
Rule 506 offering.

7 17 C.F.R. 230.501(a).
8 See Rule 501(a) (17 C.F.R. 230.501(a))for the complete

definition of accredited investor.

9 17 C.F.R. 230.502(a).
10 As defined in Rule 405 (17 C.F.R. 230.405), the term

employee benefit plan means any written purchase, sav-

ings, option, bonus, appreciation, profit sharing, thrift,

incentive, pension or similar plan or written compensa-

tion contract solely for employees, directors, general

partners, trustees (where the registrant is a business

trust), officers, or consultants or advisors. However,

consultants or advisors may participate in an employee

benefit plan only if: (1) They are natural persons; (2)

They provide bona fide services to the registrant; and (3)

The services are not in connection with the offer or sale

of securities in a capital-raising transaction, and do not

directly or indirectly promote or maintain a market for

the registrant's securities.

11 17 C.F.R. 230.901 et. seq.
12 See 17 C.F.R. 230.500 and SEC Release No. 33-6863

(April 24, 1990).

13 Rule 902(c) (17 C.F.R. 230.902(c)) defines directed sell-

ing efforts as "any activity undertaken for the purpose of,

or that could reasonably be expected to have the effect

of, conditioning the market in the United States for any

of the securities being offered in reliance on this Regula-

tion S (Rule 901 through Rule 905, and Preliminary

Notes). Such activity includes placing an advertisement

in a publication `with a general circulation in the United

States" that refers to the offering of securities being

made in reliance upon this Regulation S.' The definition

also describes a publication "with a general circulation

in the United States," and specifies disclosures that are

not directed selling efforts.

14 See comments posted at http://www.sec.gov/comments/

jobs-title-ii/jobs-title-ii.shtml.

15 See comment letter of Jeffrey W. Rubin, Chair, Federal

Regulation of Securities Committee, Business Law Sec-

tion, American Bar Association, New York, New York

dated April 30, 2012, p. 4.