In a joint press release issued on January 15, 2014, five federal agencies indicated their approval of an interim final rule to permit banking entities to retain interests in collateralized debt obligations backed primarily by trust preferred securities (“TruPS CDOs”). These interests would have otherwise been prohibited
January 2014
SEC provides guidance for new Rule 506 offerings
As more and more companies take advantage of the SEC’s recent rule change allowing general solicitation and advertising in private offerings, lots of interpretative questions on how to apply the new rules have arisen. Over the course of the last couple of months, the Staff at the SEC has provided some guidance on some of the more frequently asked questions. To help our readers keep up, I have included the Staff’s advice below with my own commentary.
Question: An issuer takes reasonable steps to verify the accredited investor status of a purchaser and forms a reasonable belief that the purchaser is an accredited investor at the time of the sale of securities. Subsequent to the sale, it becomes known that the purchaser did not meet the financial or other criteria in the definition of “accredited investor” at the time of sale. Assuming that the other conditions of Rule 506(c) were met, is the exemption available to the issuer for the offer and sale to the purchaser?
Answer: Yes. An issuer does not lose the ability to rely on Rule 506(c) for an offering if a person who does not meet the criteria for any category of accredited investor purchases securities in the offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor at the time of the sale of securities. [Nov. 13, 2013]
My Take: This interpretation should not be a surprise, but it is welcomed anyway. Rule 506(c) offerings require issuers to take reasonable steps and to form a reasonable belief that each investor is accredited, but Rule 506(c) does not contain an absolute belief standard. If an offering was to fail simply because an investor committed fraud on the issuer or an issuer relied on an erroneous third party verification of the investor’s accredited investor status, then it would make Rule 506(c) a very unpopular and hardly ever used exemption.
Question: An issuer intends to conduct an offering under Rule 506(c). If all of the purchasers in the offering met the financial and other criteria to be accredited investors but the issuer did not take reasonable steps to verify the accredited investor status of these purchasers, may the issuer rely on the Rule 506(c) exemption?
Answer: No. The verification requirement in Rule 506(c) is separate from and independent of the requirement that sales be limited to accredited investors. The verification requirement must be satisfied even if all purchasers happen to be accredited investors. Under the principles-based method of verification, however, the determination of what constitutes reasonable steps to verify is an objective determination based on the particular facts and circumstances of each purchaser and transaction. [Nov. 13, 2013]
My Take: The Staff is taking a very
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The SEC gets an A+ with the proposed “Regulation A+” rules
One of the most anticipated items from the JOBS Act enacted in April 2012 was the so-called Regulation A+ – a new and improved exemption that would allow issuers to raise up to $50 million in a 12-month period through a “mini-registration” process that is similar to that of rarely used Regulation A exemption. On December 18, 2013, the SEC issued its proposed rules which were mandated under Title IV of the JOBS Act.
The proposed rules would amend the current Regulation A to create two tiers of exempt offerings. Tier I would become the current Regulation A exemption, which maintains the $5 million offering limitation. Tier II would implement Regulation A+ and would permit offerings of up $50 million in any 12-month period.
Since its implementation years ago, Regulation A has not received widespread use, primarily because it did not provide for preemption of state securities laws and also had a relatively modest dollar limitation on the amount that could be raised. However, Regulation A+ (i.e., Tier II) promises to be a significant improvement over the old Regulation A because of the increased dollar limitation and the other benefits, including the potential preemption of state securities laws and regulations in certain circumstances.
All 387 pages of the proposed rules can be read on the SEC’s website, but a summary of these proposed rules are provided below for those not inclined read the entire release.
Issuer Eligibility
As proposed, Regulation A+ would be available only to United States and Canadian companies that have their principal place of business in the U.S. or Canada. Like the current Regulation A exemption, the Regulation A+ would not be available to certain types of issuers, such as companies that are already SEC reporting companies, registered investment companies and “blank-check companies.” However, under the currently proposed rules, shell companies may avail themselves of the Regulation A+ exemption so long as they are not blank-check companies.
Eligible Securities
The securities that may be offered under Regulation A are limited to equity securities, debt securities and debt securities convertible into or exchangeable into equity interests, including any guarantees of such securities, but would exclude asset-backed securities.
Investor Limitations
As proposed, investors in a Tier II offering may acquire no more than
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