Corrected to Conform to the Federal Register Version SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 230 and 239 Release No. 33-9416; Release No. 34-69960; Release No. IC-30595; File No. S7-06-13 RIN 3235-AL46 Amendments to Regulation D, Form D and Rule 156 AGENCY: Securities and Exchange Commission. ACTION: Proposed rules. SUMMARY: The Securities and Exchange Commission, which today in separate releases amended Rule 506 of Regulation D, Form D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the Jumpstart Our Business Startups Act and Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is publishing for comment a number of proposed amendments to Regulation D, Form D and Rule 156 under the Securities Act. These proposed amendments are intended to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506. Specifically, the proposed amendments to Regulation D would require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation; require the filing of a closing amendment to Form D after the termination of any Rule 506 offering; require written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures; require the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission; and disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering. The proposed amendments to Form D would require an issuer to include additional information about offerings conducted in reliance on Regulation D. Finally, the proposed amendments to Rule 156 would extend the antifraud guidance contained in the rule to the sales literature of private funds. DATES: Comments should be received on or before September 23, 2013. ADDRESSES: Comments may be submitted by any of the following methods: Electronic comments: • Use the Commission’s Internet comment form (http://www.sec.gov/rules/proposed.shtml); • Send an email to [email protected]. Please include File Number S7- 06-13 on the subject line; or • Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments. Paper comments: • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-06-13. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all 2 comments on the Commission’s Internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Charles Kwon, Special Counsel or Ted Yu, Senior Special Counsel, Office of Chief Counsel, or Karen C. Wiedemann, Attorney Fellow, Office of Small Business Policy, Division of Corporation Finance, at (202) 551-3500; or, with respect to private funds, Melissa Gainor or Alpa Patel, Senior Counsels, Investment Adviser Regulation Office, Division of Investment Management, at (202) 551-6787, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 156,1 Rules 503,2 5063 and 5074 of Regulation D,5 and Form D6 under the Securities Act of 1933.7 We are proposing to add Rule 509 and Rule 510T of Regulation D under the Securities Act. 1 17 CFR 230.156. 2 17 CFR 230.503. 3 17 CFR 230.506. 4 17 CFR 230.507. 5 17 CFR 230.500 through 230.508. 6 17 CFR 239.500. 7 15 U.S.C. 77a et seq. 3 TABLE OF CONTENTS I. INTRODUCTION II. PROPOSED AMENDMENTS RELATING TO FORM D A. Background B. Timing of the Filing of Form D C. Form D Closing Amendment for Rule 506 Offerings D. Proposed Amendments to the Content Requirements of Form D E. Proposed Amendment to Rule 507 III. PROPOSED RULE AND RULE AMENDMENTS RELATING TO GENERAL SOLICITATION MATERIALS A. Mandated Legends and Other Disclosures for Written General Solicitation Materials B. Proposed Amendments to Rule 156 C. Request for Comment on Manner and Content Restrictions for Private Funds IV. PROPOSED TEMPORARY RULE FOR MANDATORY SUBMISSION OF WRITTEN GENERAL SOLICITATION MATERIALS V. REQUEST FOR COMMENT ON THE DEFINITION OF “ACCREDITED INVESTOR” VI. ADDITIONAL REQUESTS FOR COMMENT VII. GENERAL REQUEST FOR COMMENT VIII. PAPERWORK REDUCTION ACT A. Background B. Burden and Cost Estimates Related to the Proposed Amendments 1. Proposed Amendments Relating to Form D 2. Rule 506(c) General Solicitation Materials C. Request for Comment IX. ECONOMIC ANALYSIS A. Broad Economic Considerations B. Economic Baseline 1. Size of the Exempt Offering Market 2. Affected Market Participants a. Issuers b. Investors c. Investment Advisers 4 d. Broker-Dealers 3. Incidence of Fraud in Securities Offerings 4. Current Practices a. Missing Form D Filings b. Legends and Other Disclosures in Regulation D Offering Materials C. Analysis of the Amendments Relating to Form D 1. Advance Filing of Form D for Rule 506(c) Offerings 2. Form D Closing Amendment for Rule 506 Offerings 3. Amendments to the Content Requirements of Form D a. Investor Types b. Issuer Size c. Issuer Industry Group d. Control Persons e. Trading Venue and Security Identifiers f. Use of Proceeds g. Issuer Website h. Types of General Solicitation Used i. Verification Methods 4. Proposed Amendment to Rule 507 D. Analysis of the Proposed Rule and Rule Amendments Relating to General Solicitation Materials 1. Mandated Legends and Other Disclosures for Written General Solicitation Materials 2. Proposed Amendments to Rule 156 3. Requests for Comment on Manner and Content Restrictions for Private Funds E. Analysis of Temporary Rule Relating to Mandatory Submission of Written General Solicitation Materials F. Analysis of Potential Impacts on Efficiency, Competition and Capital Formation X. SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT XI. INITIAL REGULATORY FLEXIBILITY ANALYSIS A. Reasons for, and Objectives of, the Proposed Action B. Small Entities Subject to the Proposed Rule and Form Amendments C. Projected Reporting, Recordkeeping and Other Compliance Requirements D. Duplicative, Overlapping or Conflicting Federal Rules E. Significant Alternatives F. General Request for Comment XII. STATUTORY AUTHORITY AND TEXT OF PROPOSED RULE AND FORM AMENDMENTS 5 I. INTRODUCTION We are adopting today, in separate releases, amendments to Rule 506 of Regulation D8 and to Form D9 to implement Section 201(a)(1) of the Jumpstart Our Business Startups Act (the “JOBS Act”)10 and Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).11 Rule 506 was originally adopted as a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”), the statutory exemption from Securities Act registration for transactions by an issuer “not involving any public offering.”12 To implement Section 201(a)(1) of the JOBS Act, we are adding new paragraph (c) to Rule 506, which permits issuers to use general solicitation and general advertising (collectively, “general solicitation”) when conducting an offering pursuant to this new paragraph, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors.13 We 8 17 CFR 230.506. The Commission adopted Rule 506 and Regulation D in 1982 as a result of the Commission’s evaluation of the impact of its rules on the ability of small businesses to raise capital. See Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)]. Over the years, the Commission has revised various provisions of Regulation D in order to address, among other things, specific concerns relating to facilitating capital raising as well as abuses that have arisen under Regulation D. See, e.g., Additional Small Business Initiatives, Release No. 33-6996 (Apr. 28, 1993) [58 FR 26509 (May 4, 1993)] and Revision of Rule 504 of Regulation D, the “Seed Capital” Exemption, Release No. 33-7644 (Feb. 25, 1999) [64 FR 11090 (Mar. 8, 1999)]. 9 17 CFR 239.500. 10 Pub. L. No. 112-106, sec. 201(a), 126 Stat. 306, 313 (Apr. 5, 2012). See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9354 (Aug. 29, 2012) [77 FR 54464 (Sept. 5, 2012)] (“Rule 506(c) Proposing Release”). 11 Pub. L. No. 111-203, sec. 926, 124 Stat. 1376, 1851 (July 21, 2010) (codified at 15 U.S.C. 77d note). 12 15 U.S.C. 77d(a)(2). As with the Section 4(a)(2) statutory exemption, Rule 506 is available only to the issuer of the securities and not to any affiliate of the issuer or to any other person for resales of the issuer’s securities. See 17 CFR 230.500(d). 13 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (July 10, 2013) (“Rule 506(c) Adopting Release”). In addition to 6 are also adding a new check box to Form D to require issuers to indicate that they are relying on Rule 506(c) for their offering.14 To implement Section 926 of the Dodd-Frank Act, we are adding new paragraph (d) to Rule 506, which disqualifies issuers and other market participants from relying on Rule 506 if “felons and other ‘bad actors’” are participating in the offering.15 We are also amending the form of the signature block to Form D to include a certification whereby issuers claiming a Rule 506 exemption will confirm that the offering is not disqualified from reliance on Rule 506. We anticipate that new Rule 506(c) will have a significant impact on Rule 506 offerings and on current capital-raising practices. Among other things, we anticipate that issuers using Rule 506(c) will be able to reach a greater number of potential investors than is currently the case in Rule 506 offerings, thereby increasing their access to sources of capital.16 As a result, accredited investors may be able to find and potentially invest in a larger and more diverse pool of investment opportunities, which could result in a more efficient allocation of capital by accredited investors. On the other hand, we recognize the concerns raised by a number of commenters that a general solicitation for a Rule 506(c) offering would attract both accredited and non-accredited investors and could these requirements, under new Rule 506(c), all terms and conditions of Rule 501 and Rules 502(a) and 502(d) of Regulation D [17 CFR 230.501 and 502(a) and (d)] must be satisfied. 14 As discussed in Section II.A of this release, Form D is the notice of an offering of securities made without registration under the Securities Act in reliance on an exemption provided by Regulation D or Section 4(a)(5) of the Securities Act. 15 Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-9414 (July 10, 2013). 16 Currently, under Rule 506(b) [17 CFR 230.506(b)], an issuer may sell securities, without any limitation on the offering amount, to an unlimited number of “accredited investors,” as defined in Rule 501(a) of Regulation D, and to no more than 35 non-accredited investors who meet certain “sophistication” requirements. The availability of Rule 506(b) is subject to the terms and conditions of Rules 501 and 502 and is conditioned on the issuer, or any person acting on its behalf, not offering or selling securities through any form of “general solicitation or general advertising.” 7 result in an increase in fraudulent activity in the Rule 506 market, as well as an increase in unlawful sales of securities to non-accredited investors. Many comments submitted on the Rule 506(c) Proposing Release, including the comments submitted by the Investor Advisory Committee, urged the Commission to propose or adopt other amendments to Regulation D or to Form D17 that they believed would be appropriate in connection with the adoption of the amendments to implement Section 201(a) of the JOBS Act.18 For example, several commenters suggested that we amend Regulation D to provide that the availability of the new Rule 506(c) exemption be conditioned on compliance with the Form D filing requirement,19 require Form D to be filed in advance of any general solicitation20 and add to the information requirements of 17 To facilitate public input on JOBS Act rulemaking before the issuance of rule proposals, the Commission invited members of the public to make their views known on various JOBS Act initiatives in advance of any rulemaking by submitting comment letters to the Commission’s website at http://www.sec.gov/spotlight/jobsactcomments.shtml. The comment letters relating to Section 201(a) of the JOBS Act submitted in response to this invitation are located at http://www.sec.gov/comments/jobs- title-ii/jobs-title-ii.shtml. The comment letters submitted in response to the Rule 506(c) Proposing Release are located at http://www.sec.gov/comments/s7-07-12/s70712.shtml. Many commenters submitted comment letters both before and after the issuance of the Rule 506(c) Proposing Release. Our references to comment letters in this release that are not dated refer to the comment letters submitted in response to the Rule 506(c) Proposing Release. Dated comment letters refer to those submitted before the issuance of the Rule 506(c) Proposing Release or by commenters that submitted multiple letters. 18 See, e.g., letters from Fund Democracy, Inc. (“Fund Democracy”); North American Securities Administrators Association, Inc. (“NASAA”); Consumer Federation of America (“Consumer Federation”); SEC Investor Advisory Committee (“Investor Advisory Committee”). The Investor Advisory Committee was established in April 2012 pursuant to Section 911 of the Dodd-Frank Act to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the Investor Advisory Committee to submit findings and recommendations for review and consideration by the Commission. On October 12, 2012, the Investor Advisory Committee unanimously approved and submitted recommendations to the Commission titled, Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiently Balancing Investor Protection, Capital Formation and Market Integrity. The recommendations are available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-general-solicitation- advertising-recommendations.pdf. 19 See, e.g., letters from Investor Advisory Committee; NASAA; AARP; Consumer Federation. 20 See, e.g., letters from Office of the Secretary of the Commonwealth of Massachusetts Securities Division (“Massachusetts Securities Division”) (July 2, 2012); NASAA; Securities Division, Nevada 8 Form D.21 In light of the fact that the financial thresholds in the definition of “accredited investor” that relate to natural persons have not been updated since their adoption in 1982,22 some commenters recommended that the Commission also amend the definition of “accredited investor” as it relates to natural persons.23 Other commenters suggested that we propose rules governing the content and manner of general solicitations used in offerings conducted pursuant to the new Rule 506(c) exemption, particularly with respect to offerings by private funds.24 Several commenters also recommended that we require the filing or submission of general solicitation materials used pursuant to the new Rule Secretary of State (“Nevada Securities Division”); Ohio Division of Securities; Securities Commissioner, State of South Carolina (“South Carolina Securities Commissioner”); State Corporation Commission, Division of Securities and Retail Franchising, Commonwealth of Virginia (“Virginia Division of Securities”). 21 See, e.g., letters from AARP; AFL-CIO and Americans for Financial Reform (“AFR”); Consumer Federation; Massachusetts Securities Division (July 2, 2012); NASAA. 22 See Release No. 33-6389. For natural persons, Rule 501(a) defines an accredited investor as a person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million, excluding the value of the person’s primary residence (the “net worth test”) or who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the “income test”). Although the Dodd-Frank Act did not change the amount of the $1 million net worth test, it did change how that amount is to be calculated – by excluding the value of a person’s primary residence. This change took effect upon the enactment of the Dodd-Frank Act, and in December 2011, we amended Rule 501 to incorporate this change into the definition of accredited investor. See Net Worth Standard for Accredited Investors, Release No. 33-9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)]. 23 See, e.g., letters from AARP; Consumer Federation; Investment Company Institute (“ICI”); Investor Advisory Committee; Massachusetts Securities Division (July 2, 2012); Ohio Division of Securities (July 3, 2012). Several commenters noted that under the Commission’s proposal in 2007 to partially lift the prohibition on general solicitation for offerings sold only to “large accredited investors,” such investors who were natural persons would have been required to have at least $400,000 in annual income or $2.5 million in investments. See letters from AFL-CIO and AFR; Fund Democracy; AARP. One commenter, however, opposed increasing the thresholds for accredited investor status. See letter from National Small Business Association (June 12, 2012). 24 See, e.g., letters from ICI; AFL-CIO and AFR; Consumer Federation; Investor Advisory Committee; Independent Directors Council (“IDC”); NASAA; Sens. Reed, Levin, Durbin, Harkin, Lautenberg, Franken and Akaka. 9 506(c) exemption, whether to the Financial Industry Regulatory Authority (“FINRA”),25 to an electronic “drop box” to be created by the Commission specifically to receive general solicitation materials26 or as an exhibit to Form D.27 In light of these comments and the magnitude of the change that the elimination of the prohibition against general solicitation represents to the Rule 506 market, we are proposing today a number of amendments in conjunction with the adoption of new Rule 506(c). These amendments are intended to enhance the Commission’s understanding of the Rule 506 market by improving compliance with Form D filing requirements, expanding the information requirements of Form D, primarily with respect to Rule 506 offerings, and requiring the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission. We believe that the elimination of the prohibition against general solicitation for Rule 506(c) offerings will have a significant impact on the Rule 506 market, including the types of issuers that raise capital using Rule 506, the investors who are solicited and ultimately purchase securities in the offerings, the intermediaries that participate in this market, the practices employed by issuers and intermediaries and the amount of capital that will be raised. To review and analyze these changes more effectively, and to facilitate the assessment of the effects of such changes on investor protection and capital formation, the Commission staff will need better tools to evaluate this changing market than are currently provided 25 See letters from AFL-CIO and AFR; BetterInvesting (recommending that “the SEC require all public solicitation materials under Rule 506 to be independently reviewed for compliance (perhaps by an independent authority such as FINRA, which already reviews broker-dealer advertising) before or after the public solicitation” (emphasis omitted)); ICI. 26 See letters from Investor Advisory Committee; Consumer Federation. 27 See letters from Massachusetts Securities Division (July 2, 2012); Ohio Division of Securities (July 3, 2012). 10