On August 31, the Securities and Exchange Commission proposed amendments to SEC Rule 506 eliminating the prohibition against general solicitation and advertising in a Rule 506 offering when all purchasers are accredited investors. Under the proposal, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that:
1. The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
2. All purchasers of securities are accredited investors, because either: (a) they come within one of the categories of persons who are accredited investors under existing Rule 501; or (b) the issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.
For further information, see http://www.sec.gov/news/press/2012/2012-170.htm. The Commission declined to propose any other amendments to Rule 506. This important change makes it easier to comply with Rule 506 and will likely increase the success of many companies’ efforts to raise funds under Rule 506. It may well increase the amount of fraud found in Rule 506 offerings, however.
*This post was written by Business Department Chair Rob M. Alston
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