JOBS ACT OF 2012 - RULE 506c

In April 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act). While a lot of attention was drawn to the Crowdfunding provisions it also lifted the ban on General Solicitation for a Regulation D Offering. By requiring the SEC to remove this general solicitation restriction, Congress sought to make it easier for companies to find investors and thereby raise capital.

Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506(c) provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors. The rules allowing general advertising took effect on September 23, 2013.

Reasonable Steps:

The SEC included some suggested ways an issuer can determine an accredited investor status which includes, without limitation:

• Publicly available information in filings with a federal, state or local regulatory body – for example, without limitation:
• The purchaser is a named executive officer of an Exchange Act registrant, and the registrant’s proxy statement discloses the purchaser’s compensation; or
• The purchaser claims to be an IRC Section 501(c)(3) organization with $5 million in assets, and the organization’s Form 990 series return filed with the Internal Revenue Service discloses the organization’s total assets;
• Third-party information that provides reasonably reliable evidence that a person falls within one of the enumerated categories in the accredited investor definition – for example, without limitation:
• The purchaser is a natural person and provides copies of pay stubs for the two most recent years and the current year; or
• Specific information about the average compensation earned at the purchaser’s workplace by persons at the level of the purchaser’s seniority is publicly available; or
• Verification of a person’s status as an accredited investor by a third party, provided that the issuer has a reasonable basis to rely on such third-party verification.

The JOBS Act also included a “Bad Actor” and “felons” dis-qualifier provision to prevent their use of Regulation D Rule 506.