SEC Issues Guidance on Securities Offerings Under Rule 506(b) and Rule 506(c)
Last Thursday, the SEC issued Compliance and Disclosure Interpretations (C&DIs) related to securities offerings under Rule 506. Specifically, the C&DIs address the issue of Rule 506 offerings that began prior to September 23, 2013, which was when the new Rule 506(c) exemption became effective.
As we’ve discussed in prior articles, as of September 23, 2013, companies can now use general solicitation to raise funds from investors under the new Rule 506(c). The new Rule 506(c) was detailed in the Securities Act Release No. 9415. In the release, the SEC pointed out that for offerings that had already commenced under Rule 506(b) (the classic Rule 506 that does not allow general solicitation), an issuer could choose to continue the offering under Rule 506(b) or Rule 506(c). If the issuer chooses to use Rule 506(c), any general solicitation that occurs after September 23, 2013, will not affect the exempt status of the offers and sales of securities prior to the effective date of Rule 506(c).
C&DIs offer additional guidance
The SEC offered additional guidance for the transition between Rule 506(b) offerings to Rule 506(c) offerings. In summary, if an issuer started a Rule 506 offering prior to September 23, 2013, and decides to change to a Rule 506(c) offering (after Sept. 23, 2013), the issuer is not required to take “reasonable steps to verify” the accredited investor status of the investors who purchased securities in the offering before the issuer changed the offering to a Rule 506(c) offering. From the time the issuer decides to conduct a Rule 506(c) offering, the issuer must take reasonable steps to verify the accredited investor status of all investors who invest in the company.
What if non-accredited investors were previously included in the Rule 506 offering?
The SEC’s release also points out that an issuer who relied on Rule 506 prior to September 23, 2013, and issued securities to non-accredited investors can rely on the transitional guidance that permits switching from Rule 506(b) to Rule 506(c), so long as the issuer complies with the requirements of Rule 506(c) moving forward. That is, the issuer must restrict its sale of securities to accredited investors only and take reasonable steps to verify that each investor is in fact accredited.
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