SIFMA has issued a Memorandum intended to provide broker-dealers and advisers with guidance regarding procedures for investor verification in connection with offerings made pursuant to Rule 506(c).

Morrison & Foerster has signed on to support the procedures, which are useful examples of possible approaches to verification.  The white paper and forms may be viewed here.

Other market participants may find these examples helpful as well.

On May 1st, the House Financial Services Committee will hold a hearing (see: on various proposed bills related to the JOBS Act.  One of the bills addresses the crowdfunding framework and would have the effect of striking Title III of the JOBS Act and reverting to the House version of the crowdfunding title in most respects.  Another bill addresses certain issues raised by the SEC’s proposed amendment to Regulation D, Form D and Rule 156 and has as its aim encouraging use of the ability to use general solicitation in connection with certain Rule 506.  Perhaps most significant, a bill titled the Startup Capital Modernization Act of 2014, would address state preemption in Regulation A+ offerings.  State preemption continues to raise significant controversy.  The bill makes clear that Congress intended that Tier 2 Regulation A offerings not be subject to state review.  In addition, the bill addresses various other aspects of Regulation A+, such as the Exchange Act reporting threshold.  The same bill would codify the Section 4-1/2 exemption for resales of restricted securities.

On March 13-15, 2014, Morrison & Foerster partner Marty Dunn will participate on the faculty of an ALI CLE course called “Regulation D Offerings and Private Placements.” The course will focus on private placements and the new regulatory environment as a result of the JOBS Act. The course will be held in Paradise Valley, AZ, and is also available as a webcast. For more information about the event, and to register, please visit:

On the same day that the SEC adopted changes to Rule 506 and Rule 144A in order to relax the prohibition against general solicitation, the SEC proposed for comment amendments to Form D, Regulation D and Rule 156.  These proposed rules were met with an extraordinary number of comments given that many felt that the proposed changes to the Form D filing requirements and the proposed changes to the content requirements of Form D would impose significant burdens on issuers.  However, in recent weeks, the tide seems to have turned.  Some commentators have called on the SEC to take action to move forward with the proposed rules.  For example, in a speech (available here:, Commissioner Aguilar focused on investor protection concerns.  He stated that:  “It is now almost five months since those proposals were issued for public comment.  I urge the Commission to move forward promptly to adopt the proposed rules. Doing so will not only provide a number of important investor protections that were unjustifiably omitted when the general solicitation rule was adopted, it will also provide the Commission’s staff with the necessary tools to assess whether that change has actually had the desired effect on capital formation. Every day these proposals are not adopted is another day that investors face greater harm.”  Similar views were expressed in a comment letter from Senator Levin to the Commission (available here: regarding the proposed amendments.  Senator Levin’s letter suggests that the SEC impose requirements beyond those contained in the proposed amendments.  Could this be a sign of things to come?

During the American Bar Association’s Business Law Section Fall Meeting, the Federal Regulation of Securities Committee hosted a dialogue with the Director of the SEC’s Division of Corporation Finance, Keith Higgins.  Mr. Higgins noted that the SEC Staff is tracking Rule 506 offerings, and thus far, there have been slightly over 300 offerings made using general solicitation (based on Form D data).  Mr. Higgins also noted, however, that there may be some reluctance to rely on the new rules relaxing the prohibition on general solicitation.

As previously reported, the SEC Staff intends to provide guidance in the form of Compliance and Disclosure Interpretations (CDIs) on various bad actor interpretative matters, such as the scope of the term “affiliated issuer.”  Looking ahead, Mr. Higgins noted that the SEC Staff is working on guidance regarding amended Exchange Act Section 12(g)(5) required under Title V of the JOBS Act, which provides a safe harbor for securities issued under employee compensation plans.  Mr. Higgins also noted that he understands that the ability to use general solicitation poses interesting interpretative issues relating to integration, and the SEC Staff understands that guidance on integration issues would be useful.  Mr. Higgins also indicated that the SEC Staff is aware of and thinking about some of the concerns raised by market participants regarding the definition of “general solicitation” (such as whether business plan competitions and “demo” days would constitute general solicitations) and whether communication safe harbors might be appropriate.  Finally, Mr. Higgins mentioned that the SEC’s Office of Compliance Inspections and Examinations (OCIE) will be making inquiries during broker-dealer exams regarding the use of general solicitation and investor verification procedures.

In a separate session, Joseph Price, Senior Vice President, Corporate Financing/Advertising Regulation at FINRA, noted that in almost one year since the effective date of FIRNA Rule 5123 relating to private offerings, FINRA has received over 3,000 private placement filings.  Mr. Price also noted that FINRA has approximately 20 ongoing enforcement actions related to private offerings.  Mr. Price also indicated that many private offerings that are structured as “contingency” offerings fail to use an escrow agent as required by Exchange Act Rule 15c2-4.

On November 13, 2013, the SEC issued 11 new Compliance & Disclosure Interpretations regarding Rule 144A and Rule 506(c).  For our readers’ convenience, we have put the 11 new C&DIs in their own document [].  As with previous C&DIs, many of the new ones confirm positions that the SEC has already taken in other statements, but it is very beneficial to gather these positions in one place.  The two new Rule 144A C&DIs confirm that initial purchasers as well as issuers may engage in general solicitation and that, as provided in the adopting release, Rule 144A general solicitation does not change how directed selling efforts under Regulation S are analyzed.  The nine new Rule 506(c) C&DIs address:

  • Filing requirements for a Form D for a Rule 506(b) offering commenced before September 23, 2013, the effective date for the new Rule 506(c) exemption, when the issuer proposes to change to a Rule 506(c) offering;
  • Issues surrounding reasonable steps to verify accredited investor status, including:
    • the issuer can still sell to an investor if the issuer took reasonable steps to determine accredited investor status and had a reasonable belief that the investor was an accredited investor and afterwards discovers that the investor was not an accredited investor at the time of sale;
    • the inability to rely on Rule 506(c) if the issuer does not take reasonable steps to verify accredited investor status even if all the investors were in fact accredited investors;
    • the documentation for the net worth verification method must be as of a date within three months prior to the time of sale of the securities;
    • the third party verification method may include written verifications from non-U.S. registered or licensed attorneys and certified public accountants;
    • the verification method for existing investors is limited, by its terms, to existing investors who purchased securities in the same issuer’s Rule 506(b) offering prior to September 23, 2013, as opposed to two different issuers with a sponsor in common – this will be a particular hardship for funds and other entities that have families of issuers;
  • The ability to switch from a Rule 506(b) offering to a Rule 506(c) offering, and vice versa, so long as the conditions of the applicable rule are satisfied; and
  • The ability to switch from a Rule 506(c) offering to a Section 4(a)(2) offering is limited to those situations where there has not been any general solicitation.

Quite a number of collective investment vehicles, including funds, and other entities that may not be viewed by the CFTC as “operating companies” may, in the absence of specific relief or an available exemption, be a “commodity pool.”  Many entities rely on the CFTC’s Rule 4.13 de minimis exemption (given their limited use of swaps or commodity interests) from the commodity pool characterization.  Reliance on the de minimis exemption is subject to satisfaction of various conditions, including that fund interests not be offered publicly.  Is a 506(c) offering a “public offering” for purposes of this rule?  In the absence of clarification from the CFTC, many who rely on this exemption will not be able to avail themselves of the ability to use general solicitation or general advertising.

On Thursday, October 3, 2013, Morrison & Foerster partner Anna Pinedo will participate in a complimentary Bloomberg Law Event entitled “Outlook on Securities—The JOBS Act”. The seminar will focus on the latest developments in JOBS Act rulemaking by the Securities and Exchange Commission. For more information about the event, and to register, please visit:

The new SEC “bad actor” provisions of Rule 506(d) become effective on September 23, 2013.  Investment banks, which monitor FINRA compliance by their professionals, must ensure that their compliance systems capture all the potentially new requirements of Rule 506(d).  The FINRA disclosure obligations of Forms U4 and U5 are more extensive than the Rule 506(d) provisions and for the most part, the texts are very different.  But it is clear that most of the SEC “bad actor” disqualifying events are picked up by FINRA other than Rule 506(d)(1)(viii), which addresses violations of U.S. Postal regulations.  For our readers’ convenience, attached is a chart comparing the FINRA U4/U5 disclosure obligations to Rule 506(d):

Morrison & Foerster lawyers Anna Pinedo, David Lynn, Nilene Evans and Bradley Berman have prepared several standard representations, warranties and covenants relating to the use of general solicitation under Rule 506(c) offerings and to the bad actor disqualification provision of Rule 506(d). To view the resources, please visit: