Continued from page 31
Proposed Rules Changes to Form D
The proposed rules amend Rule 503 by expanding and adding content requirements in Form D and also by increasing the frequency of the Form D filing requirements. Expanded information required includes, without limitation, control person and promoter information, disclosure of whether the Form D filing itself is an“ advance-notice” or a“ termination” Form D( detailed below), specification of the number of accredited and non-accredited investors and the amount raised from each, and details as to intended use of proceeds. Newly-required information includes number and types of participating accredited investors, specifics as to the form( s) of general solicitation used or to be used( mass mailings, emails, public websites, social media, print media, broadcast), and identification of the method( s) used or to be used to verify accredited investor status in a Rule 506( c) offering.
The frequency of the Form D filing obligation is proposed to be increased from one time to three or more times. Generally, a new“ Advance Notice” Form D is due 15 days prior to use of general solicitation in a 506( c) offering, disclosing less information than the full amount of information required by Form D. Subsequently, an amended Form D would be required to amend the advance-notice Form D, due( a) no later than 15 days after the first sale to provide all the information required by Form D that could not be included in the advance-notice;( b) as soon as practicable to disclose a material mistake, error, or material change;( c) annually, for continuing offerings, on or before the first anniversary of the most recent previously filed notice; and( d) a termination amendment within 30 days after termination of the offering( for all offerings). Form D amendments are required to include information about the remaining disclosure items not applicable to an advance-notice Form D, including offering amount, total amount of securities sold, types of general solicitation used, and the methods used to verify purchasers’ accredited investor status.
Expanded Issuer Disqualification
Currently, Rule 507 disqualifies an issuer from relying on Regulation D if the issuer has been enjoined by a court for violating the Rule 503( Form D) filing requirements. The proposed rules would amend Rule 507 to further disqualify an issuer, for one year, from conducting any follow-up on Rule 506 offerings if the issuer, its predecessor, or affiliate did not comply at any time in the preceding five-year period with the Form D filing requirements.
This additional disqualification would apply to future offerings, beginning on the date a missed filing was due, with only a single 30-day cure period to file a missed Form D or to amend an erroneous Form D permitted per offering. Finally, proposed amended Rule 507 would make Rule 506 unavailable if a court took injunctive action against the issuer or a failure to comply with either Rule 509 or Rule 510T( discussed below).
Additional Legends Required for Sales Materials Proposed new Rule 509 would require that legends be included in written solicitation materials for offerings made in reliance on 506( c), disclosing that only accredited investors are permitted; the offering is exempt from registration and need not comply with the disclosure requirements; the SEC has not approved the offering or the materials; the securities purchased are restricted; and purchasing the securities involves risk, and that investors should be able to bear the loss of the investment.
Requirement to Submit Marketing Materials to SEC Proposed new Rule 510T, to be effective for two years following adoption, would compel the submission by a 506( c) issuer of its written general solicitation materials to the SEC no later than the date of first use of the materials. The failure to submit the materials would disqualify the issuer from relying on Rule 506 in the future. This rule echoes FINRA’ s new Rule 5123 requiring broker-dealers to report and upload offering materials when engaging a placement agent for a private placement.
“ Bad Actor” Disqualification
The proposed rules also include“ bad actor” disqualifications, requiring an issuer to use reasonable care to ensure that no“ covered person”( including any director, officer, manager, significant owner, selling agent, underwriter, or placement agent) with a“ disqualifying event”( a conviction of, or subject to court or administrative sanction for, securities fraud or other violations) participated in the offering. An issuer that fails this standard will lose its securities law exemption.
Practical Effect if Proposed Rules Become Final: What Steps to Take?
The proposed rules cloud, with significant regulatory ambiguity, the easing of Regulation D by the final rules. Along with the new marketing freedom come several potential compliance and liability dangers. Although Chairman White indicated there may be a transition period for 506( c) offerings commenced prior to the finalization of the proposed rules, there is no guarantee that the proposed rules will be finalized as proposed, or that they will not be retroactively applied. Assuming the proposed rules are finalized substantially as proposed, to determine whether to rely on new Rule 506( c) issuers must also carefully consider the following issues:
Implement Timing and Disclosure Due Diligence Procedures for Revised Form D: To avoid the one-year prohibition of relying on Rule 506, issuers need to implement policies and procedures to ensure Form D filings are timely and completely made. The additional information required by the proposed rules could subject an issuer to expanded SEC inquiry and potential disclosure liability, particularly if the Form D conflicted with information in the offering documents( a real danger, given the participation of differing persons in accomplishing different steps).
32 EB5 Investors Magazine